The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page From the Horse's Mouth: Gauging Conditional Expected Stock Returns from Investor Surveys
Gene Amromin and Steven A. Sharpe

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: Equity premium, expected returns, behavioral finance

Full paper (1031 KB PDF)

Home | FEDS | List of 2005 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: May 18, 2005