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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
  • Format:Print
  • | Pages:41
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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 89, no. 5 (October 2022): 2559–2599.
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About The Authors

Mark L. Egan

Finance
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Alexander J. MacKay

Strategy
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More from the Authors
  • Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities By: Mark Egan, Shan Ge and Johnny Tang
  • How Do Investors Value ESG? By: Malcolm Baker, Mark Egan and Suproteem K. Sarkar
  • Cost Plus Drugs By: Alexander MacKay and James Barnett
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