Collecting large asset managers' capital market assumptions, we revisit the relationships between subjective equity premium expectations, equity valuations, and financial portfolios. In contrast to the well-documented extrapolative expectations of retail investors, asset managers' equity premium expectations are countercyclical: they are high (low) when valuations are low (high). We find that asset managers' portfolios reflect their heterogeneous expectations: allocation funds of asset managers with larger US equity premium expectations invest significantly more in US equities. The pass-through of expectations to portfolios seems to be muted by investment mandates and is smaller than the one predicted by a standard portfolio choice model.
|Swedish House of Finance Research Paper Series
First draft: December 2020.
- Asset management
- Expectations formation
- Semi-elasticity of demand