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  • Review of Economic Studies

Recovering Investor Expectations from Demand for Index Funds

By: Mark Egan, Alexander J. MacKay and Hanbin Yang
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Abstract

We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected future returns across investors. Our analysis is facilitated by the prevalence of leveraged funds that track the same underlying asset: by choosing between higher and lower leverage, investors trade off higher return against less risk. Our estimates indicate that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors due to the presence of contrarian investors.

Keywords

Stock Market Expectations; Demand Estimation; Exchange-traded Funds (ETFs); Demand and Consumers; Investment

Citation

Egan, Mark, Alexander J. MacKay, and Hanbin Yang. "Recovering Investor Expectations from Demand for Index Funds." Review of Economic Studies (forthcoming).
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About The Authors

Mark L. Egan

Finance
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Alexander J. MacKay

Strategy
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  • The Cross Section of Bank Value By: Mark Egan, Stefan Lewellen and Adi Sunderam
  • When Harry Fired Sally: The Double Standard in Punishing Misconduct By: Mark Egan, Gregor Matvos and Amit Seru
  • A Better Way to Assess Managerial Performance By: Mihir Desai, Mark Egan and Scott Mayfield
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