September 11 and Stock Return Expectations of Individual Investors

This study uses data that offers the unique opportunity to analyze how an unprecedented crisis such as the September 11 tragedy influences expected returns and volatility forecasts of individual investors. Via e-mail, we asked a randomly selected group of individual investors with accounts at a German online broker to answer an internet questionnaire at the beginning of August 2001. A second e-mail to the investors who had not yet answered, scheduled five weeks later, was postponed due to the terror attacks until September 20, which was exactly the day with the lowest share prices in Germany in the year 2001. Based on the answers to questions concerning stock market predictions, we find that return forecasts of the investors in our sample are significantly higher after September 11, suggesting a belief in mean reversion. Our results show that investors interpret the large drop in share prices during the ten day period after September 11 mainly as temporary rather than permanent. After the terror attacks, volatility forecasts are higher than before September 11. In two out of four cases, historical volatilities are overestimated. Therefore, investors are not generally overconfident in the way that they underestimate the variance of stock returns. Differences of opinion with regard to return forecasts are lower after the terror attacks whereas differences of opinion concerning volatility forecasts are mainly unaffected.We would like to thank William Goetzmann (the editor), Alexander Klos, Markus Nöth, Jens Reynders, Zacharias Sautner, an anonymous referee, several faculty members of the Fuqua School of Business, and seminar participants at the University of Mannheim for valuable comments and insights. Parts of this paper were written while Markus Glaser was visiting the Fuqua School of Business, Duke University, North Carolina, USA, whose support is gratefully acknowledged. Financial Support from the Deutsche Forschungsgemeinschaft (DFG) is also gratefully acknowledged.