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Expectations of Returns and Expected Returns

  • Robin Greenwood
  • Andrei Shleifer

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18686.

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Date of creation: Jan 2013
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Publication status: published as Robin Greenwood & Andrei Shleifer, 2014. "Expectations of Returns and Expected Returns," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 714-746.
Handle: RePEc:nbr:nberwo:18686
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