Join the Department of Economics for a critical discussion of beliefs of institutional investors.
Speaker: Cameron Peng, London School of Economics.
Abstract
Based on a comprehensive survey covering hundreds of global asset managers over the span of 30 years, we construct a novel dataset to study the subjective beliefs of institutional investors.
In the stock market, institutional investors' return expectations are strongly negatively correlated with retail investors' return expectations.
Moreover, institutional return expectations are:
- contrarian and countercyclical
- positively correlated with perceived risk
- positively correlated with institutional flows and negatively correlated with retail flows
- negatively correlated with fundamentals expectations; in all these aspects, retail return expectations have the opposite patterns.
Institutional return expectations predict realised returns with the correct sign.
This return predictability:
- remains after controlling for known predictors
- survives out-of-sample tests
- extends to other asset classes such as bonds, commodities, and exchange rates.
We examine the sources of this return predictability and argue that it may stem from institutions having the correct perception about the mispricing of assets.
Overall, compared to retail investors, institutional investors hold beliefs that are much closer to the rational benchmark.
About the speaker
Cameron Peng is an Assistant Professor of Finance at the London School of Economics.
His research interests include Behavioural Finance, Household Finance and Asset Pricing.
Some of his recent work on these topics has been published in the Journal Of Finance, Review of Financial Studies and Journal of Financial Economics.
He is a leading organiser of the London Behavioural Finance Group (BFG), which organises meetings for students to discuss ongoing projects and new developments in Behavioural Finance.
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