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  • 2021
  • Working Paper
  • HBS Working Paper Series

Recovering Investor Expectations from Demand for Index Funds

By: Mark Egan, Alexander J. MacKay and Hanbin Yang
  • Format:Print
  • | Language:English
  • | Pages:78
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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; United States

Citation

Egan, Mark, Alexander J. MacKay, and Hanbin Yang. "Recovering Investor Expectations from Demand for Index Funds." NBER Working Paper Series, No. 26608, January 2020. (Accepted at the Review of Economic Studies. Harvard Business School Working Paper, No. 20-122, May 2020. Direct download. Revised July 2021.)
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About The Authors

Mark L. Egan

Finance
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Alexander J. MacKay

Strategy
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Related Work

    • Review of Economic Studies

    Recovering Investor Expectations from Demand for Index Funds

    By: Mark Egan, Alexander J. MacKay and Hanbin Yang
Related Work
  • Recovering Investor Expectations from Demand for Index Funds By: Mark Egan, Alexander J. MacKay and Hanbin Yang
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