Asymmetric overreaction

Emrehan Aktuğ and Abolfazl Rezghi

European Economic Review, 2025, vol. 180, issue C

Abstract: Using a large cross-country dataset covering over 150 countries and more than 10 macroeconomic variables, this study examines the consistency of IMF World Economic Outlook (WEO) forecasts with the full information rational expectations (FIRE) hypothesis. We find that WEO forecasts exhibit an overreaction to news. This overreaction is asymmetric, with a stronger response to good news than to bad news, indicating excessive optimism among forecasters. Moreover, forecasts align more closely with the FIRE hypothesis during economic downturns or when a country is under an IMF program. Overreaction is more pronounced for macroeconomic variables with low persistence and for longer-horizon forecasts, consistent with recent theoretical models. Finally, we develop a model to explain how the state-dependent nature of attentiveness may drive this asymmetric overreaction.

Keywords: Expectations; Overreaction; Information frictions; Macroeconomic forecasts (search for similar items in EconPapers)
JEL-codes: C22 D81 Q12 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S001429212500203X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:180:y:2025:i:c:s001429212500203x

DOI: 10.1016/j.euroecorev.2025.105153

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().