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The term structure of cross-sectional dispersion of expectations in a Learning-to-Forecast Experiment

Annarita Colasante (), Simone Alfarano () and Eva Camacho-Cuena
Authors registered in the RePEc Author Service: Eva Camacho Cuena ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we present the results of a Learning-to-Forecast Experiment (LtFE) eliciting short- as well as long-run expectations about the future price dynamics in markets with positive and negative expectations feedback. Comparing our results on short-run expectations to the LtFE literature, we prove that eliciting long-run expectations neither has an impact on the price dynamics nor on short-run expectations formation. In particular, we confirm that the Rational Expectation Equilibrium (REE) is a good benchmark only for the markets with negative feedback. Interestingly, our data show that the term structure of the cross-sectional dispersion of expectations is convex in positive feedback markets and concave in negative feedback markets. Differences in the slope of the term structure stem from diverse degrees of uncertainty on the evolution of prices in the two feedback systems: (i) in the negative feedback system, the convergence of the price to the REE mirrors into a tendency for coordination of long-run expectations around the fundamental value; (ii) conversely, the instability of the REE in the positive feedback system and the resulting oscillatory price dynamics are responsible for the diverging pattern of long-run expectations. Finally, we propose a new measure of heterogeneity of expectations based on the scaling of the dispersion of expectations over the forecasting horizon.

Keywords: Long-Run Expectations; Heterogeneous Expectations; Experiment; Coordination; Convergence; Learning-to-Forecast Experiment (search for similar items in EconPapers)
JEL-codes: C91 D30 G12 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

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Related works:
Journal Article: The term structure of cross-sectional dispersion of expectations in a Learning-to-Forecast Experiment (2019) Downloads
Working Paper: The term structure of cross-sectional dispersion of expectations in a Learning-to-Forecast Experiment (2018) Downloads
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