The Qualitative Expectations Hypothesis: Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment

Roman Frydman (), Soren Johansen, Anders Rahbek and Morten Tabor
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Roman Frydman: New York University
Morten Tabor: University of Copenhagen

No 59, Working Papers Series from Institute for New Economic Thinking

Abstract: We introduce the Qualitative Expectations Hypothesis (QEH) as a new approach to modeling macroeconomic and Financial outcomes. Building on John Muth`s seminal insight underpinning the Rational Expectations Hypothesis (REH), QEH represents the market`s forecasts to be consistent with the predictions of an economist`s model. However, by assuming that outcomes lie within stochastic intervals, QEH, unlike REH, recognizes the ambiguity faced by an economist and market participants alike. Moreover, QEH leaves the model open to ambiguity by not specifying a mechanism determining specific values that outcomes take within these intervals. In order to examine a QEH model`s empirical relevance, we formulate and estimate its statistical analog based on simulated data. We show that the proposed statistical model adequately represents an illustrative sample from the QEH model. We also illustrate how estimates of the statistical model`s parameters can be used to assess the QEH model`s qualitative implications.

Keywords: Asset-Price Movements; Model Ambiguity; Models with Time-Varying Parameters; REH; Behavioral Finance; GAS Models (search for similar items in EconPapers)
JEL-codes: C51 C65 D84 G02 G12 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2017-06
New Economics Papers: this item is included in nep-upt
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Related works:
Working Paper: The Qualitative Expectations Hypothesis: Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment (2017)
Working Paper: THE QUALITATIVE EXPECTATIONS HYPOTHESIS: MODEL AMBIGUITY, CONSISTENT REPRESENTATIONS OF MARKET FORECASTS, AND SENTIMENT (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:59

DOI: 10.2139/ssrn.2995140

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