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Stock market crash and expectations of American households

Publication Abstract

Hudomiet, Peter, Gabor Kezdi, and Robert Willis. 2011. "Stock market crash and expectations of American households." Journal of Applied Econometrics, 26(3): 393-415.

This paper utilizes data on subjective probabilities to study the impact of the stock market crash of 2008 on households' expectations about the returns on the stock market index. We use data from the Health and Retirement Study that was fielded in February 2008 through February 2009. The effect of the crash is identified from the date of the interview, which is shown to be exogenous to previous stock market expectations. We estimate the effect of the crash on the population average of expected returns, the population average of the uncertainty about returns (subjective standard deviation), and the cross-sectional heterogeneity in expected returns (disagreement). We show estimates from simple reduced-form regressions on probability answers as well as from a more structural model that focuses on the parameters of interest and separates survey noise from relevant heterogeneity. We find a temporary increase in the population average of expectations and uncertainty right after the crash. The effect on cross-sectional heterogeneity is more significant and longer lasting, which implies substantial long-term increase in disagreement. The increase in disagreement is larger among the stockholders, the more informed, and those with higher cognitive capacity, and disagreement co-moves with trading volume and volatility in the market. Copyright © 2010 John Wiley & Sons, Ltd.

DOI:10.1002/jae.1226 (Full Text)

PMCID: PMC3086799. (Pub Med Central)

Country of focus: United States.

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