What to Expect when Expecting Returns : Testing the Rational Expectations Hypothesis

I test the rational expectations hypothesis for stock market returns using two different samples (UBS/Gallup, CFO). Although rational expectations are conditionally rejected, unconditionally, I cannot reject equality between average investor expectations during the survey periods (2000-2003, 2004-2018) and average stock market returns over long samples (1928-2003, 1928-2018). I conclude that investors develop expectations that are equal to long-term averages of realized stock market returns. However, these expectations are almost constant and do not account for important conditional information (e.g., dividend yield). I further study the economic effects of constant expectations in a predictable economy using a heterogeneous agent model