Publications
Publications
- Review of Economic Studies
Recovering Investor Expectations from Demand for Index Funds
By: Mark Egan, Alexander J. MacKay and Hanbin Yang
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 89, no. 5 (October 2022): 2559–2599.