The Effect of Belief: Reevaluating CAY

This paper reevaluates the importance of the cay variable and studies the role of market belief for predicting changes in consumption and asset wealth. The cay variable on its own is not a stable predictor, which leads to a reasonable doubt of how robust this proxy for expectations is. We use expectations data from the Livingston Survey and Blue Chip Financial Forecast to construct the average market belief, and find that the presence of the belief variable wipes out the effect of the cay variable, and that the explanatory power of the belief variables is consistent throughout different time horizon.