Expectations Data in Asset Pricing

45 Pages Posted: 6 May 2022

See all articles by Klaus Adam

Klaus Adam

University of Mannheim; European Central Bank (ECB) - Department of Research; Centre for Economic Policy Research (CEPR)

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2022

Abstract

Asset prices reflect investors' subjective beliefs about future cash flows and prices. In this chapter, we review recent research on the formation of these beliefs and their role in asset pricing. Return expectations of individual and professional investors in surveys differ markedly from those implied by rational expectations models. Variation in subjective expectations of future cash flows and price levels appear to account for much of aggregate stock market volatility. Mapping the survey evidence into agent expectations in asset pricing models is complicated by measurement errors and belief heterogeneity. Recent efforts to build asset pricing models that match the survey evidence on subjective belief dynamics include various forms of learning about payout or price dynamics, extrapolative expectations, and diagnostic expectations. Challenges for future research include the exploration of subjective risk perceptions, aggregation of measured beliefs, and links between asset market expectations and the macroeconomy.

JEL Classification: E71,G12,G41

Suggested Citation

Adam, Klaus and Nagel, Stefan, Expectations Data in Asset Pricing (May 2, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-59, Available at SSRN: https://ssrn.com/abstract=4101459 or http://dx.doi.org/10.2139/ssrn.4101459

Klaus Adam

University of Mannheim ( email )

Department of Economics
L7 ,3-5
Mannheim, 68131
Germany

HOME PAGE: http://adam.vwl.uni-mannheim.de/1528.0.html

European Central Bank (ECB) - Department of Research ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Stefan Nagel (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Germany

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