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Review of Financial Studies 2026

Forward Return Expectations

Mihir Gandhi1; Niels Joachim Gormsen1,2; Eben Lazarus3

1 Copenhagen Business School and the Danish Finance Institute , · 2 Booth School of Business, University of Chicago and NBER · 3 Haas School of Business, University of California Berkeley and NBER

Abstract

We measure investors’ short- and long-term stock-return expectations using both options and survey data. These expectations at different horizons reveal what investors think their own short-term expectations will be in the future, or forward return expectations. Across data sources, investors’ forward return expectations are countercyclical, especially when measured as forward risk premiums. This countercyclical variation is, however, excessive, as changes in forward return expectations are too large relative to subsequent realized short-term expectations. The excess variation in forward return expectations can help account for a meaningful share of the stock-price declines during the global financial crisis and the COVID-19 crisis.

DOI
10.1093/rfs/hhag096
Language
en
Sources
crossref

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