How Much Do Subjective Growth Expectations Matter for Asset Prices?

140 Pages Posted: 17 Sep 2022 Last revised: 16 May 2024

See all articles by Aditya Chaudhry

Aditya Chaudhry

Ohio State University - Fisher College of Business

Date Written: September 3, 2022

Abstract

I quantify the impact of belief distortions in investors' subjective cash flow growth expectations on asset prices. Given the lack of data on investor growth expectations, I propose a novel structural approach for recovering changes in investor expectations around analyst announcements by using structure on investor learning. I find a 1% increase in annual investor growth expectations raises asset prices contemporaneously by 60% to 90% less than in standard models. This small static impact implies prices incorporate changes in expectations gradually, which can occur if investors' asset demand responds slowly to changes in expectations. I show that in a quantitative model with slow-moving asset demand, this gradual incorporation significantly dampens how much belief distortions amplify return volatility.

Keywords: Subjective Beliefs, Expectations, Demand-Based Asset Pricing, High-Frequency Identification, Machine Learning

JEL Classification: G12,G4

Suggested Citation

Chaudhry, Aditya, How Much Do Subjective Growth Expectations Matter for Asset Prices? (September 3, 2022). Available at SSRN: https://ssrn.com/abstract=4209688 or http://dx.doi.org/10.2139/ssrn.4209688

Aditya Chaudhry (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Ave
Building 249
Columbus, OH 43210
United States

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