From the Horse's Mouth: Gauging Conditional Expected Stock Returns from Investor Survey

47 Pages Posted: 25 Mar 2005  

Gene Amromin

Federal Reserve Bank of Chicago

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Date Written: February 2005

Abstract

We use data obtained from a series of Michigan Surveys of Consumer Attitudes to study stock market beliefs and portfolio choices of individual investors. We find that expected returns over the medium- and long-term horizon appear to be extrapolated from past realized returns. The findings also indicate that a more optimistic assessment of macroeconomic conditions coincides with higher expected returns and lower expected volatility, implying strongly procyclical Sharpe ratios. These results are given added credence by the empirical finding that reported portfolio concentrations in equities tend to be higher for respondents who anticipate higher returns and lower uncertainty. Overall, our empirical results lend support to the hypothesis that equity valuations are lower during recessions - and subsequent returns are higher - because of undue pessimism about future returns, rather than high risk aversion.

Keywords: expected returns, investor surveys

Suggested Citation

Amromin, Gene and Sharpe, Steven A., From the Horse's Mouth: Gauging Conditional Expected Stock Returns from Investor Survey (February 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=686944 or http://dx.doi.org/10.2139/ssrn.686944

Gene Amromin

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Steven A. Sharpe (Contact Author)

Federal Reserve Board - Research & Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

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