Do Survey Probabilities Match Financial Market Beliefs?

This paper considers whether survey respondents' views regarding the likelihood of stock index returns exceeding specific thresholds are comparable to market views indicated by index options with strikes at analogous thresholds. It is motivated by the observation thatthe wording used to elicit...

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Bibliographic Details
Published inThe journal of behavioral finance Vol. 19; no. 2; pp. 209 - 220
Main Authors Lumsdaine, Robin L, van Loon, Rogier J D Potter
Format Journal Article
LanguageEnglish
Published United States Taylor & Francis Ltd 01.01.2018
Subjects
Polls & surveys
Probability
Put & call options
Securities markets
Survey expectations
Probabilistic assessment
Option-implied probabilities
Subjective response
RAND American Life Panel (ALP)
focal points
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Summary:This paper considers whether survey respondents' views regarding the likelihood of stock index returns exceeding specific thresholds are comparable to market views indicated by index options with strikes at analogous thresholds. It is motivated by the observation thatthe wording used to elicit subjective beliefs in surveys about expected future returns resembles the question a purchaser of a call option might ask. Building on this association, we document a similarity between the views of survey respondents and those of financial market participants as measured through call options, although the association is not one-for-one. We find a closer association for those demonstrating a better understanding of the laws of probability, suggesting that numeracy affects the accuracy of an elicited response.
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ISSN:1542-7560
1542-7579
DOI:10.1080/15427560.2017.1376330