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STOCK MARKET CRASH AND EXPECTATIONS OF AMERICAN HOUSEHOLDS
Péter Hudomiet1, Gábor Kézdi, Robert J Willis
1Department of Economics, University of Michigan, Ann Arbor.
Journal of Applied Economics
|May 7, 2011
Summary
The 2008 stock market crash temporarily raised household expectations and uncertainty about stock market returns. However, it led to a significant and lasting increase in disagreement among investors regarding future returns.
Area of Science:
- Behavioral Economics
- Financial Markets
- Household Finance
Background:
- The 2008 stock market crash significantly impacted financial markets and investor behavior.
- Understanding household expectations is crucial for financial market stability.
Purpose of the Study:
- To analyze the impact of the 2008 stock market crash on households' expectations of stock market returns.
- To investigate changes in expected returns, uncertainty, and disagreement among investors post-crash.
Main Methods:
- Utilized data from the Health and Retirement Study (2008-2009).
- Employed reduced-form regressions and a structural model to analyze subjective probability data.
- Identified the crash's effect using the exogeneity of interview dates relative to prior expectations.
Main Results:
- Observed a temporary increase in average expected returns and uncertainty immediately following the crash.
- Found a significant and prolonged increase in cross-sectional disagreement about expected returns.
- Disagreement amplified among stockholders, informed individuals, and those with higher cognitive capacity.
Conclusions:
- The stock market crash induced short-term shifts in expectations and uncertainty.
- The crash led to a more substantial and enduring increase in investor disagreement.
- Investor characteristics and market conditions (volume, volatility) correlate with increased disagreement.
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