Five Facts about Beliefs and Portfolios

We study a newly designed survey administered to a large panel of wealthy retail investors. The survey elicits beliefs that are important for macroeconomics and finance, and matches respondents with administrative data on their portfolio composition, their trading activity, and their login behavior. We establish five facts inthese data. (i) Beliefs are reflected in portfolio allocations. The sensitivity of portfolios to beliefs is small on average, but varies significantly with investor wealth, attention, trading frequency, and confidence. (ii) Belief changes do not predict when investors trade, but conditional on trading, they affect both the direction and the magnitude of trades. (iii) Beliefs are mostly characterized by large and persistent individual heterogeneity. Demographic characteristics explain only asmall part of why some individuals are optimistic and some are pessimistic. (iv) Expected cash flow growth and expected returns are positively related, both within and across investors. (v) Expected returns and the subjective probability of rare disasters are negatively related, both within and across investors. These five facts provide useful guidance for the design of macro-finance models. (JEL D83, E23, G11, G12, G41, G51)

Equity Is Cheap for Large Financial Institutions

Across a wide panel of countries, the top-10% of financial stocks on average account for over 20% of a country’s market capitalization but earn on average significantly lower returns than do nonfinancial firms of the same size and risk exposures. In a bailout-augmented, rare disasters asset pricing model, the spread in risk-adjusted returns between large and small institutions depends on country characteristics that determine the likelihood of bailouts. Consistent with this model, we find larger spreads in countries with large and interconnected financial sectors, weaker capital regulation and corporate governance, and fiscally stronger governments. Valuation gaps increase in anticipation of financial crises. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.