We introduce diagnostic expectations into a standard setting of price formation in which investors learn about the fundamental value of an asset and trade it. We study the interaction of diagnostic ...expectations with learning from prices and speculation (buying for resale). With diagnostic (but not with rational) expectations, these mechanisms lead to price paths exhibiting three phases: initial underreaction, then overshooting (the bubble), and finally a crash. With learning from prices, the model generates price extrapolation as a by-product of beliefs about fundamentals, lasting only as the bubble builds up. When investors speculate, even mild diagnostic distortions generate substantial bubbles.
The aim of the article is to present possible consequences caused by the development of commodity market financialization understood by the influence of financial investor’s speculation. Also the ...task of elaboration is to outline the existence of financial factors in the price creation process of commodities. The existing impact of financialization on the volatility of commodity prices significantly modifies the market. The results of the research and analyzes carried out indicate a similarity in the behavior of the markets of commodities. The situation results from the redistribution of the risk of financial investors who having a few goods in the investment portfolio, next to large transaction volumes affect the unification of price trends. Price shaping factors are being transformed. The decrease importance of supply or consumption in the context of the commodities market changes its form. The growing influence of investors who create numerous speculations transforms the market. Trade in
contracts affects the level of commodities prices.
We survey New Zealand firms and document novel facts about their macroeconomic beliefs. There is widespread dispersion in beliefs about past and future macroeconomic conditions, especially inflation. ...This dispersion in beliefs is consistent with firms’ incentives to collect and process information. Using experimental methods, we find that firms update their beliefs in a Bayesian manner when presented with new information about the economy and that changes in their beliefs affect their decisions. Inflation is not generally perceived as being important to business decisions so firms devote few resources to collecting and processing information about inflation.
We study the out-of-sample and post-publication return predictability of 97 variables shown to predict cross-sectional stock returns. Portfolio returns are 26% lower out-of-sample and 58% lower ...post-publication. The out-of-sample decline is an upper bound estimate of data mining effects. We estimate a 32% (58%-26%) lower return from publication-informed trading. Post-publication declines are greater for predictors with higher in-sample returns, and returns are higher for portfolios concentrated in stocks with high idiosyncratic risk and low liquidity. Predictor portfolios exhibit post-publication increases in correlations with other published-predictor portfolios. Our findings suggest that investors learn about mispricing from academic publications.
Diagnostic Expectations and Credit Cycles BORDALO, PEDRO; GENNAIOLI, NICOLA; SHLEIFER, ANDREI
The Journal of finance (New York),
02/2018, Letnik:
73, Številka:
1
Journal Article
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We present a model of credit cycles arising from diagnostic expectations—a belief formation mechanism based on Kahneman and Tversky's representativeness heuristic. Diagnostic expectations overweight ...future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, and thus is immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified framework. In our model, credit spreads are excessively volatile, overreact to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.
Abstract
We use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms’ economic decisions. In the survey, a randomly chosen subset of ...firms is repeatedly treated with information about recent inflation whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase demand for credit, and reduce their employment and capital. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.
How does the economy respond to news about future policies or future fundamentals? Standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others ...will respond. Relaxing this assumption attenuates the general equilibrium effects of news and rationalizes a form of myopia at the aggregate level. We establish these insights within a class of games which nests, but is not limited to, the New Keynesian model. Our results help resolve the forward-guidance puzzle, offer a rationale for the front-loading of fiscal stimuli, and illustrate more broadly the fragility of predictions that rest on long series of forward-looking feedback loops.
•Textual news data and machine learning methods are used to analyze expectations.•News media coverage predicts households’ inflation expectations.•State-dependent information rigidity among ...households is explained by the news.•Study highlights media’s important (independent) role in the expectation formation process.
Using a large news corpus and machine learning algorithms we investigate the role played by the media in the expectations formation process of households, and conclude that the news topics media report on are good predictors of both inflation and inflation expectations. In turn, in a noisy information model, augmented with a simple media channel, we document that the time series features of relevant topics help explain time-varying information rigidity among households. As such, we provide a novel estimate of state-dependent information rigidities and present new evidence highlighting the role of the media in understanding inflation expectations and information rigidities.
Diagnostic Expectations and Stock Returns BORDALO, PEDRO; GENNAIOLI, NICOLA; LA PORTA, RAFAEL ...
The Journal of finance (New York),
12/2019, Letnik:
74, Številka:
6
Journal Article
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We revisit La Porta's finding that returns on stocks with the most optimistic analyst long-term earnings growth forecasts are lower than those on stocks with the most pessimistic forecasts. We ...document the joint dynamics of fundamentals, expectations, and returns of these portfolios, and explain the facts using a model of belief formation based on the representativeness heuristic. Analysts forecast fundamentals from observed earnings growth, but overreact to news by exaggerating the probability of states that have become more likely. We find support for the model's predictions. A quantitative estimation of the model accounts for the key patterns in the data.
Consumers rely on the price changes of goods in their grocery bundles when forming expectations about aggregate inflation. We use micro data that uniquely match individual expectations, detailed ...information about consumption bundles, and item-level prices. The weights consumers assign to price changes depend on the frequency of purchase, rather than expenditure share, and positive price changes loom larger than negative price changes. Prices of goods offered in the same store but not purchased do not affect inflation expectations, nor do other dimensions. Our results provide empirical guidance for models of expectations formation with heterogeneous consumers.
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