Although expectations are also in part extrapolative, this effect is transient. The paper’s approach underscores the central importance of opening models to structural change and imposing discipline on econometric analysis through specification testing. Our findings support the novel hypothesis that rational market participants, faced with unforeseeable change, base their forecasts on both fundamentals - the focus of the REH approach - and the psychological and technical considerations underlying behavioral finance.
Stock-Market Expectations: Econometric Evidence that both REH and Behavioral Insights Matter
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Behavioral finance views stock-market investors’ expectations as largely unrelated to fundamental factors. Relying on survey data, this paper presents econometric evidence that fundamentals are a major driver of investors’ expectations.
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- WP 44-Frydman-and-Stillwagon (pdf, 584.51 KB)
- C2 Single Equation Models • Single Variables
- C22 Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
- G1 General Financial Markets
- G12 Asset Pricing • Trading Volume • Bond Interest Rates
- G14 Information and Market Efficiency • Event Studies • Insider Trading
- G02 Behavioral Finance: Underlying Principles
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