The Qualitative Expectations Hypothesis: Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment

38 Pages Posted: 23 Jun 2017

See all articles by Roman Frydman

Roman Frydman

New York University (NYU) - Department of Economics

Soren Johansen

University of Copenhagen - Department of Economics; Aarhus University - CREATES

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research; University of Copenhagen - Department of Economics

Morten Tabor

University of Copenhagen - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 22, 2017

Abstract

We introduce the Qualitative Expectations Hypothesis (QEH) as a new approach to modeling macroeconomic and financial outcomes. Building on John Muth's seminal insight underpinning the Rational Expectations Hypothesis (REH), QEH represents the market's forecasts to be consistent with the predictions of an economist's model. However, by assuming that outcomes lie within stochastic intervals, QEH, unlike REH, recognizes the ambiguity faced by an economist and market participants alike. Moreover, QEH leaves the model open to ambiguity by not specifying a mechanism determining specific values that outcomes take within these intervals. In order to examine a QEH model's empirical relevance, we formulate and estimate its statistical analog based on simulated data. We show that the proposed statistical model adequately represents an illustrative sample from the QEH model. We also illustrate how estimates of the statistical model's parameters can be used to assess the QEH model's qualitative implications.

Keywords: Asset-Price Movements, Model Ambiguity, Models with Time-Varying Parameters, REH, Behavioral Finance, GAS Models

JEL Classification: D84, C65, G02, G12, C51

Suggested Citation

Frydman, Roman and Johansen, Soren and Rahbek, Anders and Tabor, Morten, The Qualitative Expectations Hypothesis: Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment (June 22, 2017). Available at SSRN: https://ssrn.com/abstract=2991014 or http://dx.doi.org/10.2139/ssrn.2991014

Roman Frydman

New York University (NYU) - Department of Economics ( email )

19 West 4th Street
New York, NY 10012
United States

Soren Johansen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Aarhus University - CREATES ( email )

Nordre Ringgade 1
Aarhus, DK-8000
Denmark

Anders Rahbek

University of Copenhagen - Department of Statistics and Operations Research

Universitetsparken 5
DK-2100
Denmark
+45 3532 0682 (Phone)

University of Copenhagen - Department of Economics

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Morten Tabor

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Register to save articles to
your library

Register

Paper statistics

Downloads
45
Abstract Views
386
PlumX Metrics