Expectations Formation with Fat-tailed Processes: Evidence from Sales Forecasts

Eugene Larsen-Hallock, Adam Rej and David Thesmar

Papers from arXiv.org

Abstract: We empirically analyze a large sample of firm sales growth expectations. We find that the relationship between forecast errors and lagged revision is non-linear. Forecasters underreact to typical (positive or negative) news about future sales, but overreact to very significant news. To account for this non-linearity, we propose a simple framework, where (1) sales growth dynamics have a fat-tailed high frequency component and (2) forecasters use a simple linear rule. This framework qualitatively fits several additional features of data on sales growth dynamics, forecast errors, and stock returns.

Date: 2022-10
New Economics Papers: this item is included in nep-bec
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