Behavioral Impulse Responses

85 Pages Posted: 21 Nov 2024 Last revised: 7 Nov 2024

See all articles by Bryan T. Kelly

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Emil Siriwardane

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Hongyu Wu

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 29, 2024

Abstract

We develop the concept of a Behavioral Impulse Response (BIR), which uses the dynamics of forecast errors to trace out how deviations from full-information rational expectations (FIRE) are corrected over time. BIRs based on professional forecasts of macroeconomics outcomes and corporate earnings imply that violations of FIRE occur much more frequently than suggested by existing tests. These deviations tend to correct gradually, often over several quarters, with sizable variation in correction speeds across different forecast targets and forecasters. Our theoretical analysis highlights why BIRs provide a simple yet powerful set of moments that can be used to discipline models of belief formation.

Keywords: Belief formation, Forecasting, Rational Expectations, Behavioral Economics

JEL Classification: C52, C53, D83, D84, E7, E17, G17, G14

Suggested Citation

Kelly, Bryan T. and Malamud, Semyon and Siriwardane, Emil and Wu, Hongyu, Behavioral Impulse Responses (October 29, 2024). Available at SSRN: https://ssrn.com/abstract=5003581 or http://dx.doi.org/10.2139/ssrn.5003581

Bryan T. Kelly

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Semyon Malamud

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Emil Siriwardane (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hongyu Wu

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

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