New Tests of Expectation Formation with Applications to Asset Pricing Models
53 Pages Posted: 4 Jun 2020
Date Written: May 1, 2020
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: Suggested Citation