Dynamics and Heterogeneity of Subjective Stock Market Expectations

Abstract

Between 2004 and 2016, we elicited individuals' subjective expectations of stock market returns in a Dutch internet panel at bi-annual intervals. In this paper, we develop a panel data model with a finite mixture of expectation types who differ in how they use past stock market returns to form current stock market expectations. The model allows for rounding in the probabilistic responses and for observed and unobserved heterogeneity at several levels. We estimate the type distribution in the population and find evidence for considerable heterogeneity in expectation types and meaningful variation over time, in particular during the financial crisis of 2008/09. JEL codes: D12, D84, G11

Policy Uncertainty and Information Flows: Evidence from Pension Reform Expectations

“…Their results suggest that individuals focus on recent stock market performance when assessing future stock market returns. See also Heiss et al (2019). In a related paper, Kezdi and Willis (2011) provide evidence indicating that heterogeneity in stock market expectations come from different learning histories, with those who can gain more from learning more likely to gather information.…”

Beliefs About the Stock Market and Investment Choices: Evidence from a Field Experiment

“…For instance, Dominitz and Manski (2011) document that while 41 percent of US households form return expectations in line with a belief in persistence, beliefs in mean reversion are also quite prevalent with 32 percent. Heiss, Hurd, van Rooij, Rossmann and Winter (2019) find that beliefs in persistence and mean reversion are equally prevalent in a survey of Dutch households (about 20 percent for each). Moreover, several studies document that retail investors exhibit contrarian trading behavior around earnings surprises (Grinblatt andKeloharju, 2000, 2001;Luo, Ravina, Sammon and Viceira, 2020), consistent with a belief in mean reversion of individual stock returns.…”

“…Andre, Pizzinelli, Roth and Wohlfart (2021) document a large extent of heterogeneity in households' beliefs about the effects of macroeconomic shocks on unemployment and inflation. In the context of the aggregate stock market, different groups of households seem to believe in persistence -a positive autocorrelation - (Adam, Marcet and Beutel, 2017;De Bondt, 1993;Greenwood and Shleifer, 2014;Vissing-Jorgensen, 2003) or in mean reversion -a negative autocorrelation -of returns (Dominitz and Manski, 2011;Heiss, Hurd, van Rooij, Rossmann and Winter, 2019), even though empirically the autocorrelation of aggregate returns is close to zero, at least at the annual frequency (Huang, Li, Wang and Zhou, 2020). 1 But do differences in individuals' mental models causally lead to differences in economic decisions?…”

“…Some papers document that average return expectations reported in household surveys increase following high return realizations (Adam, Marcet and Beutel, 2017;De Bondt, 1993;Greenwood and Shleifer, 2014;Vissing-Jorgensen, 2003). Other papers use panel data to classify individuals according to how they update their return expectations following changes in realized returns (Dominitz and Manski, 2011;Heiss, Hurd, van Rooij, Rossmann and Winter, 2019), and find that beliefs in persistence, beliefs in mean reversion, and beliefs that the stock market follows a random walk with drift are all fairly prevalent among households. There are some potential concerns with indirectly classifying individuals according to expectation revisions following market movements.…”

Life-Cycle Portfolio Choice with Stock Market Loss Framing: Explaining the Empirical Evidence

“…Additionally, regime switching seems to make sense from a behavioral point of view, as there is evidence that individual investors see the stock market as a Markov chain. While some investors believe that past stock returns tend to persist in the future (De Bondt 1993;Greenwood and Shleifer 2014), other investors believe that stock returns tend to reverse (Dominitz and Manski 2011;Heiss et al 2019).…”