TY - UNPB
T1 - The Qualitative Expectations Hypothesis
T2 - Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment
AU - Frydman, Roman
AU - Johansen, Søren
AU - Rahbek, Anders
AU - Tabor, Morten Nyboe
PY - 2017
Y1 - 2017
N2 - We introduce the Qualitative Expectations Hypothesis (QEH) as a new approachto 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.
AB - We introduce the Qualitative Expectations Hypothesis (QEH) as a new approachto 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.
KW - Faculty of Social Sciences
KW - Asset-Price Movements
KW - Model Ambiguity
KW - Models with Time-Varying Parameters
KW - REH
KW - Behavioral Finance
KW - GAS Models
KW - rational expectations
M3 - Working paper
T3 - University of Copenhagen. Institute of Economics. Discussion Papers (Online)
BT - The Qualitative Expectations Hypothesis
ER -