The Qualitative Expectations Hypothesis: Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment
Soren Johansen (),
Anders Rahbek and
Morten Tabor ()
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Roman Frydman: Department of Economics, New York University
Anders Rahbek: University of Copenhagen, Postal: Department of Economics, University of Copenhagen, Øster Farimagsgade 5, 1353 Copenhagen K, Denmark
CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
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: D84 C65 G02 G12 C51 (search for similar items in EconPapers)
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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:aah:create:2017-23
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