Expectation Error

55 Pages Posted: 28 Jun 2019

See all articles by Xiao Zhang

Xiao Zhang

University of Chicago - Booth School of Business

Date Written: June 25, 2019

Abstract

I backcast expectation errors of credit spreads via machine learning. I use newspapers over the past century to construct text-based expectations of credit spreads and study the relationship between expectation errors and business cycles. The main result is that overoptimism about future credit spreads predicts lower GDP growth and higher unemployment over the medium run, even after controlling for past and prevailing credit spreads. This finding suggests credit-market sentiment is an important driver of economic fluctuations. Consistent with this story, I also find both the amount of net debt issuance and the ratio of debt to equity issuance increase following periods of overoptimism.

Keywords: Expectation, Textual Analysis, Behavioral Finance

JEL Classification: G4

Suggested Citation

Zhang, Xiao, Expectation Error (June 25, 2019). Available at SSRN: https://ssrn.com/abstract=3410410 or http://dx.doi.org/10.2139/ssrn.3410410

Xiao Zhang (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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