Are long-horizon expectations (de-)stabilizing? : theory and experiments / by George Evans, Cars Hommes, Bruce McGough and Isabelle Salle.: FB3-5/2019-27E-PDF
"We consider boundedly rational agents who do not plan over the infinite future but make trading plans at a finite, arbitrary horizon. We investigate the role of that horizon in the price dynamics of an asset in a Lucas tree model. We then design a laboratory experiment to test our theoretical predictions against the behaviors of human subjects. Short-horizon markets are prone to substantial and prolonged deviations from rational expectations (RE). By contrast, markets populated by even a modest share of long-horizon forecasters exhibit convergence towards the fundamental price. Longer-horizon forecasts do display more heterogeneity and thus some departure from RE; however this same heterogeneity also prevents the coordination of subjects on wrong anchors—a pattern of behavior that leads to mispricing in short-horizon markets. Long-horizon forecasts are well-described by adaptive learning, which delivers convergence to RE equilibrium, while short-horizon forecasts exhibit destabilizing trend-chasing"--Abstract.
Permanent link to this Catalogue record:
publications.gc.ca/pub?id=9.877352&sl=0
| Department/Agency | Bank of Canada. |
|---|---|
| Title | Are long-horizon expectations (de-)stabilizing? : theory and experiments / by George Evans, Cars Hommes, Bruce McGough and Isabelle Salle. |
| Series title | Bank of Canada staff working paper, 1701-9397 ; 2019-27 |
| Publication type | Series - View Master Record |
| Language | [English] |
| Format | Electronic |
| Electronic document | |
| Note(s) | "August 2019." Includes bibliographical references (pages 32-34) . |
| Publishing information | [Ottawa] : Bank of Canada = Banque du Canada, 2019. ©2019 |
| Author / Contributor | Evans, George, author. Hommes, Carsien Harm, author. McGough, Bruce, author. Salle, Isabelle, author. |
| Description | 1 online resource (ii, 61 pages) : figures. |
| Catalogue number |
|
| Subject terms | Markets |