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New Tests of Expectation Formation with Applications to Asset Pricing Models

Pei Kuang (), Renbin Zhang () and Tongbin Zhang ()
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Renbin Zhang: Universitat Autonoma de Barcelona (UAB) and Barcelona GSE
Tongbin Zhang: Shanghai University of Finance and Economics (SUFE)

Discussion Papers from Department of Economics, University of Birmingham

Abstract: We show unit root econometrics can be fruitfully employed to analyze expectations data and test expectation formation in financial and macroeconomic models with different informational assumptions. Survey data suggests stock price forecasts are not cointegrated with consumption forecasts and rejects this aspect of the formation of stock price expectations in a wide range of asset pricing models. The evidence casts some doubt on the modeling of expectation formation in asset pricing models which assume agents possess the knowledge of the equilibrium pricing function. Relaxing this knowledge appears necessary for models to reconcile the survey evidence and potential resolutions are discussed.

Keywords: Survey Expectation; Cointegration; Sentiment; Learning; Heterogeneous Beliefs (search for similar items in EconPapers)
JEL-codes: D84 G12 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ore
Date: 2019-05
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Handle: RePEc:bir:birmec:19-05