The Qualitative Expectations Hypothesis: Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment
Research output: Working paper › Research
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 economistís 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.
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 economistís 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.
Original language | English |
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Number of pages | 38 |
Publication status | Published - 2017 |
Series | University of Copenhagen. Institute of Economics. Discussion Papers (Online) |
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Number | 17-10 |
ISSN | 1601-2461 |
Series | Institute for New Economic Thinking Working Paper Series |
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Number | 59 |
- Faculty of Social Sciences - Asset-Price Movements, Model Ambiguity, Models with Time-Varying Parameters, REH, Behavioral Finance, GAS Models, rational expectations
Research areas
Links
- https://www.economics.ku.dk/research/publications/wp/dp_2017/1710.pdf
Submitted manuscript
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991014
Submitted manuscript
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2995130
Submitted manuscript
ID: 182324679