Return Expectations and Portfolios: Evidence from Large Asset Managers

64 Pages Posted: 14 Jan 2021 Last revised: 29 Jul 2021

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Markus Ibert

Board of Governors of the Federal Reserve System; Swedish House of Finance

Date Written: July 29, 2021

Abstract

The largest asset managers in the world report their expectations publicly in so-called capital market assumptions. We collect these expectations and revisit the relationship between equity premium expectations and equity valuation ratios. Asset managers' equity premium expectations are high when valuations are low and low when valuations are high (countercyclical), and the term structure of equity premium expectations is downward sloping when valuations are low and upward sloping when valuations are high (procyclical). Studying mutual funds that invest in both equities and bonds, we find that the sensitivity of portfolios to expectations is large on average and even larger for funds that are less constrained by their investment mandates. Overall, the results support rational expectations asset pricing models.

Keywords: Expectations formation, stock market expectations, asset management

JEL Classification: G00, G12, G23

Suggested Citation

Dahlquist, Magnus and Ibert, Markus, Return Expectations and Portfolios: Evidence from Large Asset Managers (July 29, 2021). Swedish House of Finance Research Paper No. 21-1, Available at SSRN: https://ssrn.com/abstract=3763796 or http://dx.doi.org/10.2139/ssrn.3763796

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Markus Ibert (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm, 11160
Sweden

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