Stock Market Expectations Research Articles

Measurement Error in Subjective Expectations and the Empirical Content of Economic Models

While stock market expectations are among the most important primitives of portfolio choice models, their measurement has proved challenging for some respondents. We argue that the magnitude of measurement error in subjective expectations can be used as an indicator of the degree to which economic models of portfolio choice provide an adequate representation of individual decision processes. In order to explore this conjecture empirically, we estimate a semiparametric double index model on a dataset specifically collected for this purpose. Stock market participation reacts strongly to changes in model parameters for respondents at the lower end of the measurement error distribution; these effects are much less pronounced for individuals at the upper end. Our findings indicate that measurement error in subjective expectations provides useful information to uncover heterogeneity in choice behavior.

Weather, Mood, and Stock Market Expectations: When Does Mood Affect Investor Sentiment?

Using survey-based explicit investor sentiment measures, this paper analyzes when investors' stock market expectations are a ffected by weather-induced mood. This study provides new insights into mood and decision making by directly comparing private and institutional investors. This paper shows that while private investors' stock market expectations are biased through weather conditions, expectations of institutional investors are not biased. Private investors' biases are longer-term. There is a signi fficant positive eff ect of barometric pressure on investors' 6-months expectations. Short-term investor sentiment, however, is not aff ected. I conclude that higher stock returns on days when the weather is pleasant are due to longer-term induced optimism, not due to short-term optimism.

Low Risk and High Return – Affective Attitudes and Stock Market Expectations

AbstractThis experimental study investigates the impact of affective attitudes on risk and return estimates of stocks. Participants rate well‐known blue‐chip firms on an affective scale and forecast risk and return of the firms’ stock. We find that positive affective attitudes lead to a prediction of high return and low risk, while negative attitudes lead to a prediction of low return and high risk. This bias increases with participants’ confidence in their ratings and decreases with financial literacy. Firm characteristics such as a firm's marketing expenditures and the strength of its brand have a positive impact on its affective rating.

What do professional forecasters' stock market expectations tell us about herding, information extraction and beauty contests?

Abstract We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that the average of all forecasters' beliefs influences an individual's own forecast. This effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends more on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.

Stock Market Optimism and Portfolio Allocation of American Households

This paper employs subjective stock market expectation responses from Health and Retirement Survey as a proxy for stock market optimism of American households. I first ask if individuals are inert in terms of forming their optimistic stock market views. Second I analyze the impact of optimism on portfolio allocation of individuals by disentangling between time-varying and time constant individual traits. To do the two stage estimation, I use the latterly enhanced bias correction method from Fernandez-Val and Vella (2011) which allows the estimation of a dynamic probit model with fixed effects and bias corrected mills ratio. My results reveal that stock market optimism is a persistent subjective perception where individuals are inert in their way off processing information and updating their beliefs. Additionally, optimistic individuals tend to invest more in risky assets in their financial portfolios where time-varying individual specific factors have adverse effects.

Financial Overconfidence Over Time - Foresight, Hindsight, and Insight of Investors

Overconfidence leads to increased trading activity, higher risk taking, and less diversification. In a panel survey of online brokerage clients, we ask for stock market and portfolio expectations and derive several overconfidence measures from the responses. Overconfidence is present in our sample in various forms. By matching survey data with investors' actual transactions and portfolio holdings, we find an influence of overplacement on trading activity, of overprecision and overestimation on degree of diversification, and of overprecision and overplacement on risk taking. We explore the evolution of overconfidence over time and identify a role of past success and hindsight on subsequent degree of overconfidence.

What do Professional Forecasters' Stock Market Expectations tell us about Herding, Information Extraction and Beauty Contests?

We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that expectations about the average of all forecasters' forecasts influences an individual's own forecast and that this effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate otherwise dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.

The Cross-Section of Country News, Decoupling Expectations, and Global Business Cycles

We define decoupling as an increase in the cross-country heterogeneity in long-term growth expectations. We identify growth expectations from a cointegrating relation between a country's output level and its stock market valuation. Fluctuations in this output-price or yp-ratio reflect changes in perceptions about future real activity (output growth) or changes in the expectation of long-term stock market returns or both. Shocks to the cross-country dispersion of yp-ratios therefore provide information on the heterogeneity of the international cross-section of country-specific news about future real (output growth) and financial (return) opportunities. We show that shocks to the international cross-section of news have particularly high trend growth effects in Emerging Asia including China, particularly in the period since the Asian financial crisis. A factor analysis of the cross-section of stock market and output growth expectations reveals an increasing role for regional factors in both financial markets and for output growth. Whereas the role of regional factors in output growth has increased at the expense of global factors - a possible instance of decoupling - financial factors have become more regional at the expense of purely country-specific influences.

Stock market expectations of Dutch households

Despite its importance for the analysis of life-cycle behavior and, in particular, retirement planning, stock ownership by private households is poorly understood. Among other approaches to investigate this puzzle, recent research has started to elicit private households' expectations of stock market returns. This paper reports findings from a study that collected data over a two-year period both on households' stock market expectations (subjective probabilities of gains or losses) and on whether they own stocks. We document substantial heterogeneity in financial market expectations. Expectations are correlated with stock ownership. Over the two years of our data, stock market prices increased, and expectations of future stock market price changes also increased, lending support to the view that expectations are influenced by recent stock gains or losses.

Do Investors Put Their Money Where Their Mouth Is? Stock Market Expectations and Investing Behavior

To understand how real investors use their beliefs and preferences in investing decisions, we examine a panel survey of self-directed online investors at a UK bank. The survey asks for return expectations, risk expectations, and risk tolerance of these investors in three-month intervals between 2008 and 2010. We combine the survey data with investors’ actual trading data and portfolio holdings. We find that investor beliefs have little predictive power for immediate trading behavior. The exception is a positive effect of increases in return expectation on buying activity. Portfolio risk levels and changes are more systematically related to return and risk expectations. In line with financial theory, risk taking increases with return expectations and decreases with risk expectations. In response to their expectations, investors also adjust the riskiness of assets they trade.

Low Risk and High Return - Affective Attitudes and Stock Market Expectations

Low Risk and High Return - Affective Attitudes and Stock Market Expectations

STOCK MARKET CRASH AND EXPECTATIONS OF AMERICAN HOUSEHOLDS.

This paper utilizes data on subjective probabilities to study the impact of the stock market crash of 2008 on households' expectations about the returns on the stock market index. We use data from the Health and Retirement Study that was fielded in February 2008 through February 2009. The effect of the crash is identified from the date of the interview, which is shown to be exogenous to previous stock market expectations. We estimate the effect of the crash on the population average of expected returns, the population average of the uncertainty about returns (subjective standard deviation), and the cross-sectional heterogeneity in expected returns (disagreement). We show estimates from simple reduced-form regressions on probability answers as well as from a more structural model that focuses on the parameters of interest and separates survey noise from relevant heterogeneity. We find a temporary increase in the population average of expectations and uncertainty right after the crash. The effect on cross-sectional heterogeneity is more significant and longer lasting, which implies substantial long-term increase in disagreement. The increase in disagreement is larger among the stockholders, the more informed, and those with higher cognitive capacity, and disagreement co-moves with trading volume and volatility in the market.

The Beliefs of Others - Naive Realism and Investment Decisions

In a panel survey of private investors, we show that investors use their beliefs about the stock market expectations of others in their investment decisions. These second-order beliefs have a positive effect on investing beyond own risk and return expectations, but they are inaccurate and exhibit several well-known psychological biases. First-order and second-order beliefs differ greatly despite the fact that investors have only a vague idea what other participants are thinking. Among the biases we observe is investors' belief that their own opinion is relatively more common among the population and that others who hold divergent expectations are biased.

Stock Market Expectations of Dutch Households

Stock Market Expectations of Dutch Households

Harvesting Biotechnology Ventures: Modeling the Probabilities for Alternatives Liquidity Events

The path from invention to innovation is a complex process where several factors play a critical role in the success of it. The biotechnology industry has almost three decades creating commercial products and emerging and growing as an entrepreneurial business with strong ties to science and technology, scientific infrastructure, R&D investment, financial resources, specialized human capital, collaborative agreements and alliances, FDA policies among others. This study focus on the exit strategies used for the biotechnology industry in the last 31 years and the main factors that determine the likelihood of these liquidity events. The research findings give us evidence, empirically, of the drivers that participate and shape the evolution, dynamic, characteristics, and frequency of the liquidity events in the biotechnology industry. Funds availability, venture capitalists, investors, and entrepreneurs willing to take risk in biotechnology firms have been key elements in the flourishing and growing of the biotechnology sector. Venture capital funding and rounds have had a significant impact in the decisions about liquidity events in the biotechnology industry. Firm’s assets as patents and strategic alliances and collaborative agreements have contributed significantly in the evolution and dynamic of the liquidity events in the biotechnology industry. These assets establish and lead certain conditions in the firms’ decisions, including the decision of the best exit strategy to have the higher return of the investment. GDP generates economic resources that have an important effect in the creation of wealth through biotechnology firms. The findings in this research show that GDP does have a significant impact in the dynamic of the exit strategies. Stock market perception, valuation, and expectation are important elements with direct and indirect effects on the liquidity events and their characteristics and frequencies in the biotechnology firms. The atmosphere and environment created by regions with specific characteristics as strong scientific infrastructure, health and life sciences institutions, and venture capital investment are conditions that are crucial in the evolution of the biotechnology industry. We found that locations and clusters of biotechnology firms have a significant impact on the type of exit strategy investors decide to take to recover their investment in an optimal way.

Stock Market Expectations of Dutch Households

Despite its importance for the analysis of life-cycle behavior and, in particular, retirement planning, stock ownership by private households is poorly understood. Among other approaches to investigate these puzzles, recent research has started to elicit private households’ expectations of stock market returns. This paper reports findings from a study that collected data over a two-year period both on households’ stock market expectations (subjective probabilities of gains or losses) and on whether they own stocks. We document substantial heterogeneity in financial market expectations. Expectations are correlated with stock ownership. Over the two years of our data, stock market prices increased, and expectations of future stock market price changes also increased, lending support to the view that expectations are influenced by recent stock gains or losses.

ANÁLISE EMPÍRICA DA PRÁTICA DE INSIDER TRADING EM PROCESSOS DE FUSÕES E AQUISIÇÕES RECENTES NA ECONOMIA BRASILEIRA

Insider trading creates opportunities for some agents in the market to profit in detriment of others thereby transferring wealth between shareholders. Announcement of a merger or acquisition is an opportunity for this practice as it usually causes significant price changes and impacts stock market expectations of these agents. An analysis was made to detect insider trading in recent mergers and acquisitions by large Brazilian companies, An Event Study searched for abnormal returns and compared averages of variables signaling behavior in the market (liquidity) for common and preferred stocks as well as American Depositary Receipts of ten companies. Empirical analysis identified insider trading by abnormal returns and volumes of trading with increased liquidity prior to announcement of the event.

Effort Allocation of Insurance Agent under Asymmetric Information: An Analytical Approach

This study examines the relationship between incentive contracts for managers and the allocation of efforts by the managers as well as the stock market’s role in monitoring allocation of the efforts. It also evaluates solvency regulation in Japan and its effects on the compensation of a manager and allocation of the manager’s efforts and on the shareholders’ profits in a market with asymmetric information. Particularly, we employ a principal-agency model to demonstrate how uncertainty in the insurance market affects the way managers allocate their efforts so that their companies can achieve a higher solvency ratio in order to meet not only regulatory requirements but also stock market expectation. We find presence of a solvency margin ratio that, subject to certain conditions, increases the level of “good” effort, decreases the level of “bad” effort by the manager and increases the expected stock price.

Effort Allocation of Insurance Agent under Asymmetric Information: An Analytical Approach

This study examines the relationship between incentive contracts for managers and the allocation of efforts by the managers as well as the stock market’s role in monitoring allocation of the efforts. It also evaluates solvency regulation in Japan and its effects on the compensation of a manager and allocation of the manager’s efforts and on the shareholders’ profits in a market with asymmetric information. Particularly, we employ a principal-agency model to demonstrate how uncertainty in the insurance market affects the way managers allocate their efforts so that their companies can achieve a higher solvency ratio in order to meet not only regulatory requirements but also stock market expectation. We find presence of a solvency margin ratio that, subject to certain conditions, increases the level of “good” effort, decreases the level of “bad” effort by the manager and increases the expected stock price.

Increasing Market Share as a Rationale for Corporate Acquisitions

This study examines the relative importance of market share in acquisitions because anecdotal evidence and economic theory suggest that merging firms benefit from larger market share. Firms might focus on market share to improve shareholder value through improved efficiency, which benefits consumers. Alternatively, higher market share could generate greater market power, which adversely affects consumers. I find that market share of merging firms increases by more than 30%, relative to the pre‐acquisition level, and the increase is even larger after I account for industry changes. Abnormal returns are positively correlated with changes in market share around acquisitions, but not with changes in industry concentration, which suggests stock market's expectation of future benefits from efficiency rather than market power. More directly, I find that merging firms’ long‐run profitability increases with market share, and the increase in profitability primarily results from better asset management.