Trade-revealed Subjective Expectations of Returns: Actions Speak Louder Than Words

Abstract

This paper studies model-free trade-revealed subjective expectations of returns using complex options trades from 2010 to 2021. Contrary to the extrapolative survey-based expectation of returns, trade-based expectations of returns positively predict future returns and are negatively correlated with past returns, highlighting the difference between survey-based expectations and trade-based expectations. Trade-revealed expectations are heterogeneous and time-varying, and such heterogeneity in beliefs predicts positively future returns. The subjective tail risk from put spread has predictive power for the aggregate market. Overall, the evidence suggests trade-revealed expectations are consistent with the rational expectation model and offers a novel high-frequency measure of subjective expectations from trade.

Keywords: Subjective Beliefs, Stock Market Expectations, Complex Options

JEL Classification: G00, G12, G23, G40