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Predictability in Financial Markets: What Do Survey Expectations Tell Us?

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Author Info
Bacchetta, Philippe
Mertens, Elmar
van Wincoop, Eric

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Abstract

There is widespread evidence of excess return predictability in financial markets. In this paper we examine whether this predictability is related to expectational errors. To consider this issue, we use data on survey expectations of market participants in the stock market, the foreign exchange market, and the bond and money markets in various countries. We find that the predictability of expectational errors coincides with the predictability of excess returns: when a variable predicts expectational errors in a given market, it typically predicts the excess return as well. Understanding expectational errors appears crucial for explaining excess return predictability.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5770.

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Date of creation: Jul 2006
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Handle: RePEc:cpr:ceprdp:5770

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Keywords: excess returns expectations survey predictability

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
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  1. Campbell, Rachel & Koedijk, Kees & Lothian, James R & Mahieu, Ronald J, 2007. "Irving Fisher, Expectational Errors, and the UIP Puzzle," CEPR Discussion Papers 6294, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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