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Expectations of Returns and Expected Returns

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  • Robin Greenwood
  • Andrei Shleifer

Abstract

We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. We reconcile the evidence by calibrating a simple behavioral model, in which fundamental traders require a premium to accommodate expectations shocks from extrapolative traders, but markets are not efficient.

Suggested Citation

  • Robin Greenwood & Andrei Shleifer, 2013. "Expectations of Returns and Expected Returns," NBER Working Papers 18686, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18686
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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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