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

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  • Philippe Bacchetta

    (Study Center Gerzensee University of Lausanne FAME & CEPR)

  • Elmar Mertens

    (Study Center Gerzensee University of Lausanne)

  • Eric van Wincoop

    (University of Virginia NBER)

Abstract

There is widespread evidence of excess return predictability in financial markets. A potential explanation is that investors make expectational errors that are predictable. To examine 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 systematic evidence of predictable expectational errors across markets, sample periods and countries. Moreover, 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. We conclude that that predictable expectational errors play a key role in understanding excess return predictability.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 102006.

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Length: 59 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:hkm:wpaper:102006

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References

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