New Tests of Expectation Formation with Applications to Asset Pricing Models

53 Pages Posted: 4 Jun 2020

See all articles by Pei Kuang

Pei Kuang

University of Birmingham

Renbin Zhang

Shandong University

Tongbin Zhang

Shanghai University of Finance and Economics

Date Written: May 1, 2020

Abstract

We develop new tests for expectation formation in financial and macroeconomic models under various informational assumptions. Survey data suggests stock price forecasts are not anchored by consumption forecasts and rejects this aspect of the formation of stock price expectations in a wide range of asset pricing models. The evidence casts some doubt on the modeling of expectation formation in the asset pricing models which assume agents possess the knowledge of the equilibrium pricing function as in Rational Expectations and Bayesian Rational Expectations models. Relaxing this knowledge appears necessary for models to reconcile the survey evidence and potential resolutions are discussed.

Keywords: Survey Expectation, Learning, RE, Bayesian RE

JEL Classification: D84, G12, G17

Suggested Citation

Kuang, Pei and Zhang, Renbin and Zhang, Tongbin, New Tests of Expectation Formation with Applications to Asset Pricing Models (May 1, 2020). Available at SSRN: https://ssrn.com/abstract=3589929 or http://dx.doi.org/10.2139/ssrn.3589929

Pei Kuang

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

Renbin Zhang

Shandong University ( email )

shanda nanlu 27
jinan, Shandong 250100
China

Tongbin Zhang (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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