Nonlinear Expectation Formation in the U.S. Stock Market

Stefan Reitz, Christian Pierdzioch and Jan-Christoph Rülke

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: This research applies data from the Livingston survey to study the time variation in the sentiment of U.S. stock-market forecasters. A Panel Smooth Transition Regression (STR) model is estimated to identify the importance of market conditions summarized by stock-market misalignments and recent returns for the formation of regressive and extrapolative expectations. We find that survey participants expect little mean reversion in times of large misalignments reflecting the observed substantial and persistent swings in stock prices. Recent returns are negatively extrapolated depending on the sign and the size of the return revealing a contrarian behavior of forecasters in the presence of market exuberance.

JEL-codes: C15 E37 G15 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-fmk and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113210

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