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Demand-based Expected Returns

Author

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  • Alessandro Crescini

    (Swiss Finance Institute - University of Geneva)

  • Fabio Trojani

    (University of Geneva; University of Turin - Department of Statistics and Applied Mathematics; Swiss Finance Institute)

  • Andrea Vedolin

    (Boston University - Department of Finance & Economics)

Abstract

We develop a framework to extract heterogeneous investors' subjective beliefs by combining option prices and portfolio holdings. We show how to recover investor-specific expected returns and risks, consensus beliefs, and belief dispersion. Using S&P 500 options' buy-sell order data, we find that subjective expected returns and Sharpe ratios vary by investor type and depend on portfolio composition. Beliefs inferred from prices alone display strong counter-cyclicality, whereas those incorporating holdings can reverse sign, exhibit muted cyclicality, and align with professional survey expectations under markettiming strategies. Our results highlight the value of holdings data in belief recovery.

Suggested Citation

  • Alessandro Crescini & Fabio Trojani & Andrea Vedolin, 2025. "Demand-based Expected Returns," Swiss Finance Institute Research Paper Series 25-90, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2590
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