1. Stock-Market Expectations: Econometric Evidence that both REH and Behavioral Insights Matter
- Author:
- Roman Frydman and Josh Stillwagon
- Publication Date:
- 06-2016
- Content Type:
- Working Paper
- Institution:
- Institute for New Economic Thinking (INET)
- Abstract:
- 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. 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.
- Topic:
- Markets, Economic Theory, Survey, and Stock Markets
- Political Geography:
- Global Focus