Measuring Biases in Expectation Formation

67 Pages Posted: 15 Jun 2018 Last revised: 8 Jun 2019

See all articles by Simas Kucinskas

Simas Kucinskas

Humboldt University of Berlin

Florian S. Peters

University of Amsterdam

Date Written: May 24, 2019

Abstract

We develop a framework for measuring biases in expectation formation. The basic insight is that under- and overreaction to new information is identified by the impulse response function of forecast errors. This insight leads to a simple and widely applicable measurement procedure. The procedure yields estimates of under- and overreaction to new information at different horizons. Our framework encompasses all major models of expectations, sheds light on existing approaches to measuring biases, and provides new empirical predictions. In an application to inflation expectations, we find that forecasters underreact to aggregate shocks but overreact to idiosyncratic shocks.

Keywords: expectation formation, bias, underreaction, overreaction

JEL Classification: C53, D83, D84, E70, G40

Suggested Citation

Kucinskas, Simas and Peters, Florian S., Measuring Biases in Expectation Formation (May 24, 2019). Available at SSRN: https://ssrn.com/abstract=3188065 or http://dx.doi.org/10.2139/ssrn.3188065

Simas Kucinskas (Contact Author)

Humboldt University of Berlin

Dorotheenstrasse 1
Berlin, Berlin 10099
Germany

HOME PAGE: http://www.simaskucinskas.com

Florian S. Peters

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TW
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
247
Abstract Views
1,123
rank
125,981
PlumX Metrics