Time-Series and Cross-Section of Risk Premia Expectations: Evidence from Financial Analysts

Abstract

I study the impact of sell-side analysts' total return expectations on financial decision-making and their properties. My findings reveal that analysts' subjective risk premia are positively correlated with institutional mutual fund flows and drive adjustments in mutual fund stock allocations. Furthermore, unlike the beliefs of CFOs, economists, and asset managers, I find that analysts' subjective risk premia predict future realized excess returns at both aggregate and individual stock levels. In out-of-sample tests, analysts' beliefs outperform other surveys. Finally, the introduction of the new expected dividend component in analysts' total return expectations leads to stronger countercyclical dynamics. 

Keywords: Subjective Beliefs, Mutual Fund Flows, Predictability, Countercylical, SML, Total Return Expectations

JEL Classification: G12,G41