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Wall Street vs. Main Street: An Evaluation of Probabilities

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  • Robin L. Lumsdaine
  • Rogier J.D. Potter van Loon

Abstract

This paper challenges recent conventional wisdom of a divide between Main Street (the average American consumer) and Wall Street (financial market participants). The views of survey respondents regarding the likelihood of stock index returns exceeding specific thresholds are compared to market views indicated by index options with strikes at analogous thresholds. The econometric specification explicitly addresses some important impediments to using elicited probabilities from survey data. We confirm that Main Street views track Wall Street views, although the association is not one-for one. We find a closer association for those demonstrating a better understanding of the laws of probability.

Suggested Citation

  • Robin L. Lumsdaine & Rogier J.D. Potter van Loon, 2013. "Wall Street vs. Main Street: An Evaluation of Probabilities," NBER Working Papers 19103, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19103
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    More about this item

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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