Expectations Data in Asset Pricing

Klaus Adam and Stefan Nagel

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Asset prices reflect investors' subjective beliefs about future cash flows and prices. In this chapter, we review recent research on the formation of these beliefs and their role in asset pricing. Return ex- pectations of individual and professional investors in surveys differ markedly from those implied by rational expectations models. Vari- ation in subjective expectations of future cash flows and price lev- els appear to account for much of aggregate stock market volatility. Mapping the survey evidence into agent expectations in asset pricing models is complicated by measurement errors and belief heterogene- ity. Recent e¤orts to build asset pricing models that match the survey evidence on subjective belief dynamics include various forms of learn- ing about payout or price dynamics, extrapolative expectations, and diagnostic expectations. Challenges for future research include the exploration of subjective risk perceptions, aggregation of measured beliefs, and links between asset market expectations and the macro- economy.

Keywords: Investor beliefs; survey forecasts; return expectations; cash flow expectations; belief formation; asset price dynamics (search for similar items in EconPapers)
JEL-codes: E71 G12 G41 (search for similar items in EconPapers)
Pages: 38
Date: 2022-02
New Economics Papers: this item is included in nep-cwa and nep-mac
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Citations: View citations in EconPapers (4)

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Working Paper: Expectations Data in Asset Pricing (2022)
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