Double-Question Survey Measures for the Analysis of Financial Bubbles and Crashes

This paper proposes a new double-question survey method that elicits information about how individuals subjective belief valuations are compared and related to their price expectations. An individual respondent is presented with two sets of questions, one that asks about his/her belief regarding the value of an asset (whether it is over- or under-valued), and another regarding his/her expectations of the future price of that asset. Responses to these two questions are then used to measure the extent to which prices are likely to move towards or away from the subjectively perceived fundamental values. Using a theoretical asset pricing model with heterogenous agents we show that there exists a negative relationship between the agents expectations of price changes and their asset valuation. Double question surveys on equity, gold and house prices provide evidence in support of such relationships, particularly in the case of house price expectations. The effects of demographic factors, such as sex, age, education, ethnicity, and income are also investigated. It is shown that for house price expectations such demographic factors cease to be statistically significant once we condition on the respondents. location and their asset valuation indicator. The results of the double-question surveys are then used to construct leading bubble and crash indicators, and their potential value is illustrated in the context of a dynamic panel regression of realized house price changes across a number of key Metropolitan Statistical Areas in the US