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Measuring and Interpreting Expectations of Equity Returns

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  • Jeff Dominitz
  • Charles F. Manski

Abstract

We analyze probabilistic expectations of equity returns elicited in the Survey of Economic Expectations in 1999 %uF8182001 and in the Michigan Survey of Consumers in 2002 %uF8182004. Our empirical findings suggest that individuals use interpersonally variable but intrapersonally stable processes to form their expectations. We therefore propose to think of the population as a mixture of expectations types, each forming expectations in a stable but different way. We use our expectations data to learn about the prevalence of several specific types suggested by research in conventional and behavioral finance, but conclude that these types do not adequately explain the diverse expectations held by the population.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11313.

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Date of creation: May 2005
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Publication status: published as Jeff Dominitz & Charles F. Manski, 2011. "Measuring and interpreting expectations of equity returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 352-370, 04.
Handle: RePEc:nbr:nberwo:11313

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  1. Jeff Dominitz & Charles F. Manski, 1996. "Perceptions of Economic Insecurity: Evidence from the Survey of Economic Expectations," NBER Working Papers 5690, National Bureau of Economic Research, Inc.
  2. Daniel Houser & Michael Keane & Kevin McCabe, 2002. "Behavior in a dynamic decision problem: An analysis of experimental evidence using a bayesian type classification algorithm," Experimental, EconWPA 0211001, EconWPA.
  3. Jeff Dominitz & Charles F. Manski, 2004. "How Should We Measure Consumer Confidence?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(2), pages 51-66, Spring.
  4. Nicholas Barberis & Andrei Shleifer & Robert W. Vishny, 1997. "A Model of Investor Sentiment," NBER Working Papers 5926, National Bureau of Economic Research, Inc.
  5. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, American Finance Association, vol. 32(4), pages 1151-68, September.
  6. Jeff Dominitz & Charles F. Manski, 2003. "How Should We Measure Consumer Confidence (Sentiment)? Evidence from the Michigan Survey of Consumers," NBER Working Papers 9926, National Bureau of Economic Research, Inc.
  7. Mayshar, Joram, 1983. "On Divergence of Opinion and Imperfections in Capital Markets," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 114-28, March.
  8. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  9. J. Dominitz & C. F. Manski, . "Using expectations data to study subjective income expectations," Institute for Research on Poverty Discussion Papers 1050-94, University of Wisconsin Institute for Research on Poverty.
  10. John R. Graham & Campbell R. Harvey, 2001. "Expectations of Equity Risk Premia, Volatility and Asymmetry from a Corporate Finance Perspective," NBER Working Papers 8678, National Bureau of Economic Research, Inc.
  11. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(4), pages 831-72, August.
  12. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc.
  13. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(1), pages 139-209, January.
  14. Charles F. Manski, 2004. "Measuring Expectations," Econometrica, Econometric Society, Econometric Society, vol. 72(5), pages 1329-1376, 09.
  15. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
  16. Welch, Ivo, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," The Journal of Business, University of Chicago Press, vol. 73(4), pages 501-37, October.
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