Crash Beliefs From Investor Surveys

NBER Working Paper No. 22143

Issued in April 2016, Revised in December 2017

NBER Program(s):Asset Pricing



Historical data suggest that the base rate for a severe, single-day stock market crash is relatively low. Surveys of individual and institutional investors, conducted regularly over a 26-year period in the United States, show that they assess the probability to be much higher. We examine factors influencing investor responses and test the role of media influence, finding evidence consistent with an availability bias. Adverse market events made salient by financial press are associated with higher subjective crash probabilities. Exogenous shocks related to earthquakes are also associated with higher probabilities. Finally, subjective crash probabilities are negatively associated with mutual fund flows.

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Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w22143

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