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Expectations Data in Asset Pricing

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  • Klaus Adam
  • Stefan Nagel

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.

Suggested Citation

  • Klaus Adam & Stefan Nagel, 2022. "Expectations Data in Asset Pricing," CRC TR 224 Discussion Paper Series crctr224_2022_337, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2022_337
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp337
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    Cited by:

    1. B. James Deaton & Chad Lawley, 2022. "A survey of literature examining farmland prices: A Canadian focus," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 70(2), pages 95-121, June.
    2. Ye Li & Chen Wang, 2023. "Valuation Duration of the Stock Market," Papers 2310.07110, arXiv.org.
    3. Florian Schuster & Marco Wysietzki & Jonas Zdrzalek, 2023. "How Heterogeneous Beliefs Trigger Financial Crises," ECONtribute Discussion Papers Series 238, University of Bonn and University of Cologne, Germany.
    4. Ayan Bhattacharya, 2022. "Arbitrage from a Bayesian's Perspective," Papers 2211.03244, arXiv.org.

    More about this item

    Keywords

    Investor beliefs; survey forecasts; return expectations; cash flow expectations; belief formation; asset price dynamics;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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