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.

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Renseignements sur la publication
Ministère/Organisme Bank of Canada.
Titre Are long-horizon expectations (de-)stabilizing? : theory and experiments / by George Evans, Cars Hommes, Bruce McGough and Isabelle Salle.
Titre de la série Bank of Canada staff working paper, 1701-9397 ; 2019-27
Type de publication Série - Voir l'enregistrement principal
Langue [Anglais]
Format Électronique
Document électronique
Note(s) "August 2019."
Includes bibliographical references (pages 32-34) .
Information sur la publication [Ottawa] : Bank of Canada = Banque du Canada, 2019.
©2019
Auteur / Contributeur Evans, George, author.
Hommes, Carsien Harm, author.
McGough, Bruce, author.
Salle, Isabelle, author.
Description 1 online resource (ii, 61 pages) : figures.
Numéro de catalogue
  • FB3-5/2019-27E-PDF
Descripteurs Markets
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