The influence of short-term subjective expectations on stock price movements

Abstract This paper examines the role of short-term subjective expectations in asset pricing by analyzing their explanatory power for stock price movements. I use a sample of the Swiss stock market from 2003 to 2022 to compute aggregate measures of subjective expectations. I find a strong positive relationship between subjective growth expectations and future realized growth. Furthermore, I observe that the forecast errors of subjective growth expectations are predictable, which should not be the case in a world of rational expectations. The proportions of variation in the price-dividend, price-earnings, and price-to-cash flow ratio are estimated using a variance decomposition approach. The results indicate that subjective expectations significantly contribute to these variations.