Sean Myers

I am an assistant professor in the finance department of the Wharton School. My research areas are Asset Pricing and Macroeconomics, with a particular interest in subjective expectations. Prior to joining Wharton, I was a post-doctoral fellow at the NBER.

Email: semyers@wharton.upenn.edu.

CV

Research

Working Papers

The Subjective Belief Factor with Tingyue Cui and Ricardo De la O (November 2024)

Subjective expectations and asset prices both revolve around distorted probabilities. Subjective expectations are expectations under biased probabilities, and asset prices are expectations under risk-neutral probabilities. Given this link, asset pricing techniques designed to estimate a Stochastic Discount Factor (SDF) can be used to estimate a Subjective Belief Factor (SBF) – a distortion that characterizes many subjective expectations, even for non-financial variables. Conversely, the Subjective Belief Factor can be used to characterize asset prices, by separating the roles of beliefs and preferences/risk. Using the Survey of Professional Forecasters and Blue Chip, we find that differences between subjective expectations and statistical expectations for 24 macroeconomic variables can be summarized (average R-squared of 50%) by a single SBF related to real GDP growth and the T-bill rate. The results are broadly consistent with extrapolation. Applying this SBF to cross-sectional stock returns, we find it accounts for the majority of excess returns for the Fama-French factors and explains about half the variation in returns across 176 anomalies, while the remaining half is attributed to preferences/risk.

Real-time expectations for many macro-economic variables can largely be explained by a single Subjective Belief Factor (SBF) based on real GDP growth and the 3-month T-bill rate. These expectations span a wide range of topics including unemployment (unempl), housing starts (housing), and corporate profits (cprof).

The Cross-Section of Subjective Expectations: Understanding Prices and Anomalies with Ricardo De la O and Xiao Han (January 2024)

2024 Best Paper Award EFA Annual Meeting; 2024 Marshall Blume Prize in Financial Research

We propose a structural model of constant gain learning about future earnings growth that incorporates preferences for the timing of cash flows. As implied by the model, a cross-sectional decomposition using survey forecasts shows that high price-earnings ratios are accounted for by both low expected returns and overly high expected earnings growth. The model quantitatively matches a number of asset pricing moments, as learning about growth interacts strongly with the preference for the timing of cash flows, and provides insights on the roles of risk premia and mispricing in the cross-section of stocks. The magnitudes and timing of the comovement between prices, earnings growth surprises, and anomaly returns are all consistent with a gradual learning process rather than expectations being highly sensitive to the most recent realization. Large earnings growth surprises do not immediately translate into large one-period returns, but instead are gradually reflected in future returns over time.

Stocks with higher P/E ratios are expected to have higher earnings growth and lower returns. These earnings growth expectations are overly high, which leads the realized returns on high P/E stocks to be even lower than expected. A model with constant gain learning about mean firm earnings growth and preferences for the timing of cash flows can match both the realized and expected dynamics of prices, returns, and earnings growth.

Public Employee Pensions and Municipal Insolvency (March 2022)

Revise and Resubmit Review of Economic Studies

This paper studies how municipal governments jointly manage spending, credit market borrowing, and public employee pensions. I model governments as levered investors who must meet non-defaultable pension obligations and may value government spending more than citizens. I quantify the model using California city-level data, including a new record of fiscal emergencies, tax increases required to maintain essential services. After the financial crisis depleted pension funds, cities engaged in excessive risk-taking: the fiscal emergency option encouraged gambling for resurrection that kept cities vulnerable to shocks well into the recovery. Restricting risk-taking does not correct this problem, but a spending cap does.

California city governments are highly levered. They issue safe liabilities (bonds and pensions) and invest in risky equity-based pension funds. The most indebted cities (Assets - Total Liabilities) are also the most levered and the most exposed to risky pension funds.

Sovereign Debt, Government Spending Cycles, and Back-loaded Pension Reforms (November 2019)

This paper studies the effect of public pension obligations on a sovereign government's commitment to repaying debt. In the model, the government can renege on its pension promises but suffers a cost from losing the trust of households about future pensions. Large pension promises act as a commitment device for debt because they require the government to have regular access to credit markets. The government's decision to default is driven by its total obligations, not just its debt. Thus, there is a range of pension obligations large enough to act as a commitment device without raising total obligations to the point of default. This otherwise deterministic economy has an endogenous cycle in which periods of high spending and increasing debt are followed by periods of pension reform and debt reduction. The model successfully produces high debt in excess of 100% GDP without default and back-loaded pension cuts that match salient features of recent reforms in six EU nations.

Publications

Subjective Cash Flow and Discount Rate Expectations Journal of Finance June 2021 with Ricardo De la O (Download Expectations)

Why do stock prices vary? Using survey forecasts, we find that cash flow growth expectations explain most movements in the S&P 500 price-dividend and price-earnings ratios, accounting for at least 93% and 63% of their variation. These expectations comove strongly with price ratios, even when price ratios do not predict future cash flow growth. In comparison, return expectations have low volatility and small comovement with price ratios. Short-term, rather than long-term, expectations account for most price ratio variation. We propose an asset pricing model with beliefs about earnings growth reversal that accurately replicates these cash flow growth expectations and dynamics.

Survey expectations of dividend growth (blue) vary substantially over time and strongly comove with the S&P 500 price-dividend ratio (red). Survey expectations of returns (green) are relatively flat over time and have low comovement with the price-dividend ratio.

Which Subjective Expectations Explain Asset Prices? Review of Financial Studies June 2024 with Ricardo De la O

Driehaus Center for Behavioral Finance Research Prize

We present a method for determining whether errors in expectations explain asset pricing puzzles without imposing assumptions about the error mechanism. Using accounting identities and survey forecasts, we find that errors in expected long-term inflation explain price variation, return predictability, and the rejection of the expectations hypothesis for aggregate stock and bond markets. Errors in short-term (long-term) nominal earnings growth expectations explain (do not explain) stock price variation and return predictability. The relevant errors are consistent with mistakes about the persistence of forecasted variables and the response to surprises. A simple framework based on fundamental extrapolation successfully replicates these findings.

Survey expectations of long-term inflation are volatile, moving almost 1-1 with expectations of short-term inflation. In contrast, for survey expectations of S&P 500 nominal earning growth, almost of all of the movements occur in short-term expectations.

The Return of Return Dominance: Decomposing the Cross-Section of Prices with Ricardo De la O and Xiao Han (September 2024)

Accepted Journal of Financial Economics

2023 Jacobs Levy Center Research Paper Prize for Best Paper; 2023 Marshall Blume Prize in Financial Research

What explains cross-sectional dispersion in stock valuation ratios? We find that 75% of dispersion in price-earnings ratios is reflected in differences in future returns, while only 25% is reflected in differences in future earnings growth. This holds at both the portfolio-level and the firm-level. We reconcile these conclusions with previous literature which has found a strong relation between prices and future profitability. Our results support models in which the cross-section of price-earnings ratios is driven mainly by discount rates or mispricing rather than future earnings growth. Evaluating six models of the value premium, we find that most models struggle to match our results, however, models with long-lived differences in risk exposure or gradual learning about parameters perform the best. The lack of earnings growth differences at long horizons provides new evidence in favor of long-run return predictability. We also show a similar dominance of predicted returns for explaining the dispersion in return surprises.

Cross-sectional differences in stock P/E ratios are mainly explained by expensive stocks having lower future returns and higher future P/E ratios rather than higher future earnings growth. As the horizon increases, the importance of the future P/E ratio declines and is largely replaced by a bigger role for future returns.

Work in progress

Aging, Youth Unemployment, and Interest Rates with Leon Huetsch

Discussions

Couts, Goncalves, & Loudis "The Subjective Risk and Return Expectations of Institutional Investors" (University of Washington Summer Finance Conference July 2024)

D'Acunto, Weber, and Yin "Microfounding Household Debt Cycles with Extrapolative Expectations" (Duke UNC Asset Pricing Conference March 2024)

Lu and Ye "Roe v. Rates: Reproductive Healthcare and Public Financing Costs" (Bretton Woods March 2024)

Kim "The Impact of Public Pension Funds as LPs on VC Investments" (MFA March 2024)

Schreindorfer and Sichert "Volatility and the Pricing Kernel" (AFA January 2024)

Chaudhry "How Much Do Subjective Growth Expectations Matter for Asset Prices?" (USC Macro Finance Conference December 2023)

Hillenbrand and McCarthy "Heterogeneous Investors and Stock Market Fluctuations" (WFA June 2022)

Carlson, Giammarino, and Heinkel "Municipal Capital Structure" (ASU Winter Conference February 2022)