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Recovering Investor Expectations from Demand for Index Funds
[American Association of Individual Investors (AAII) Investor Sentiment Survey]

Author

Listed:
  • Mark Egan
  • Alexander MacKay
  • Hanbin Yang

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.

Suggested Citation

  • Mark Egan & Alexander MacKay & Hanbin Yang, 2022. "Recovering Investor Expectations from Demand for Index Funds [American Association of Individual Investors (AAII) Investor Sentiment Survey]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2559-2599.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:5:p:2559-2599.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab086
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    3. Matteo Benetton & Giovanni Compiani, 2020. "Investors’ Beliefs and Asset Prices: A Structural Model of Cryptocurrency Demand," Working Papers 2020-107, Becker Friedman Institute for Research In Economics.

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    More about this item

    Keywords

    Stock market expectations; Demand estimation; Exchange-traded funds (ETFs);
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G50 - Financial Economics - - Household Finance - - - General
    • L0 - Industrial Organization - - General

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