Egan, MarkMacKay, AlexanderYang, Hanbinmackay2023-06-092021-12-07Egan, Mark, Alexander J. MacKay, and Hanbin Yang. "Recovering Investor Expectations from Demand for Index Funds." Review of Economic Studies 89, no. 5 (October 2022): 2559–2599.0034-6527https://nrs.harvard.edu/URN-3:HUL.INSTREPOS:37375978We 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.>en-USEconomics and EconometricsJournal Article2023-06-0910.1093/restud/rdab086