Restrictions on Asset-Price Movements Under Rational Expectations: Theory and Evidence

2018 ◽  
Author(s):  
Ned Augenblick ◽  
Eben Lazarus
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Price Movements

The Micro and Macro of Managerial Beliefs

2020 ◽  
Author(s):  
Jose Maria Barrero
Keyword(s):  
Rational Expectations ◽  
Asset Price ◽  
Heterogeneous Firms ◽  
Adjustment Costs ◽  
Consumer Welfare ◽  
Sales Growth ◽  
Firm Level ◽  
Managerial Decisions ◽  
Managerial Beliefs ◽  
Growth Volatility

This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.

INEFFICIENT BUBBLES AND EFFICIENT DRAWDOWNS IN FINANCIAL MARKETS

2020 ◽  
Vol 23 (07) ◽  
pp. 2050047 ◽  
Author(s):  
MICHAEL SCHATZ ◽  
DIDIER SORNETTE
Keyword(s):  
Rational Expectations ◽  
Rational Expectation ◽  
Asset Price ◽  
Theoretical Background ◽  
Local Martingale ◽  
Management Problem ◽  
Market Failures ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Hyman Minsky

At odds with the common “rational expectations” framework for bubbles, economists like Hyman Minsky, Charles Kindleberger and Robert Shiller have documented that irrational behavior, ambiguous information or certain limits to arbitrage are essential drivers for bubble phenomena and financial crises. Following this understanding that asset price bubbles are generated by market failures, we present a framework for explosive semimartingales that is based on the antagonistic combination of (i) an excessive, unstable pre-crash process and (ii) a drawdown starting at some random time. This unifying framework allows one to accommodate and compare many discrete and continuous time bubble models in the literature that feature such market inefficiencies. Moreover, it significantly extends the range of feasible asset price processes during times of financial speculation and frenzy and provides a strong theoretical background for future model design in financial and risk management problem settings. This conception of bubbles also allows us to elucidate the status of rational expectation bubbles, which, by design, suffer from the paradox that a rational market should not allow for misvaluation. While the discrete time case has been extensively discussed in the literature and is most criticized for its failure to comply with rational expectations equilibria, we argue that this carries over to the finite time “strict local martingale”-approach to bubbles.

CALCULATION, ADAPTATION AND RATIONAL EXPECTATIONS

1998 ◽  
Vol 2 (2) ◽  
pp. 156-182 ◽  
Author(s):  
George W. Evans ◽  
Garey Ramey
Keyword(s):  
Adaptive Learning ◽  
Rational Expectations ◽  
Structural Changes ◽  
Asset Price ◽  
Learning Rule ◽  
Calculation Algorithm ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Rapid Adjustment ◽  
Policy Shifts

We propose an active cognition approach to bounded rationality, in which agents use a calculation algorithm to improve on the forecasts provided by a purely adaptive learning rule such as least-squares learning. Agents' choices of calculation intensity depend on their estimates of the benefits of improved forecasts relative to calculation costs. Using an asset-pricing model, we show how more rapid adjustment to rational expectations and forward-looking behavior arise naturally when there are large anticipated structural changes such as policy shifts. We also give illustrative applications in which the severity of asset price bubbles and the intensity of hyperinflationary episodes are related to the cognitive ability of the agents.

scholarly journals The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis

2007 ◽  
Vol 45 (4) ◽  
pp. 936-972 ◽  
Author(s):  
Lukas Menkhoff ◽  
Mark P Taylor
Keyword(s):  
Information Processing ◽  
Foreign Exchange ◽  
Foreign Exchange Market ◽  
Asset Price ◽  
Technical Analysis ◽  
Exchange Market ◽  
Stylized Facts ◽  
Price Movements ◽  
Inductive Analysis

Technical analysis involves the prediction of asset price movements from inductive analysis of past movements. We establish a number of stylized facts, including that technical analysis is widespread in the foreign exchange market and that it may be profitable. We then analyze four arguments that have been put forward to explain this: that the market may not be fully rational; that technical analysis may exploit the influence of official interventions; that it may be an efficient form of information processing; and that it may inform on nonfundamental influences. While each may have some validity, the latter is the most plausible. As for the foreign exchange, it is almost as romantic as young love, and quite as resistant to formulae.

Stochastic mean values, rational expectations, and price movements

1998 ◽  
Vol 61 (3) ◽  
pp. 293-299
Author(s):  
Sjur Didrik Flåm ◽  
Charles Horvath
Keyword(s):  
Rational Expectations ◽  
Mean Values ◽  
Price Movements
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