Review of Economic Studies Vol. 89 No. 5 2022
Recovering Investor Expectations from Demand for Index Funds
Abstract
We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected future returns across investors. Our analysis is facilitated by the prevalence of leveraged funds that track the same underlying asset: by choosing between higher and lower leverage, investors trade off higher return against less risk. Our estimates indicate that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors due to the presence of contrarian investors.
- DOI
- 10.1093/restud/rdab086
- Volume
- 89
- Issue
- 5
- Pages
- 2559-2599
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref