Subjective Return Expectations

79 Pages Posted: 11 Jan 2021 Last revised: 14 Jun 2021

Date Written: May 21, 2020


I document that the return expectations of Wall Street analysts are contrarian and countercyclical, contrasting with existing evidence that return expectations among Main Street investors (CFOs, retail investors) appear exclusively extrapolative and positively correlated. I demonstrate that an expectation formation framework in which investors use imperfect predictors to minimize forecast errors can rationalize these facts. Estimating the framework using surveys, I find Wall Street and Main Street disagree on what fundamental news means for future returns while agreeing on a persistent fundamental process driving most variations of asset prices. These results support models featuring heterogeneous agents with persistent fundamental expectations.

Keywords: Subjective Beliefs, Extrapolative Return Expectation, Expectation Formation, Bounded Rationality, Equity Premium, Wall Street and Main Street

JEL Classification: G1, G4, E1, E3

Suggested Citation

Renxuan, Wang, Subjective Return Expectations (May 21, 2020). Available at SSRN: or

Wang Renxuan (Contact Author)

CEIBS ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206


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