Do Subjective Growth Expectations Matter for Asset Prices?

Subjective growth expectations matter far less for asset prices than suggested by standard models. Reverse causality contaminates the correlation of growth expectations with prices: prices cause growth expectations. A 1% rise in price raises annual growth expectations 32 basis points. To quantify the causal effect of growth expectations on prices, I develop an asset demand model in which Bayesian investors learn from analysts. This causal effect is an order of magnitude smaller than assumed in standard models. A 1% rise in annual investor growth expectations raises price only 7 to 16 basis points. Inelastic demand rationalizes this small causal effect