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Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey

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  • Thomas Lux

Abstract

This paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions. We study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem. The aggregate dynamics of the individuals' decisions can be analyzed via the stochastic process governing the ensemble average of choices. Numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics. This approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization. Our application to a well-known business climate index provides strong indication of social interaction as an important element in respondents' assessment of the business climate

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File URL: https://www.ifw-members.ifw-kiel.de/publications/rational-forecasts-or-social-opinion-dynamics-identification-of-interaction-effects-in-a-business-climate-survey/KWP_1424_Rational%20Forecasts.pdf
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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1424.

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Length: 40 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:kie:kieliw:1424

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Keywords: business climate; business cycle forecasts; opinion formation; social interactions;

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Citations

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Cited by:
  1. Jan-Christoph Ruelke, 2012. "Do Private Sector Forecasters Desire to Deviate From the German Council of Economic Experts?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 232(4), pages 414-428, July.
  2. Ryuichi Yamamoto & Hideaki Hirata, . "Strategy Switching in the Japanese Stock Market," Working Paper 164466, Harvard University OpenScholar.
  3. Bolt, W. & Demertzis, D. & Diks, C.G.H. & Van der Leij, M.J., 2011. "Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 11-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  4. Jang, Tae-Seok & Sacht, Stephen, 2012. "Identification of animal spirits in a bounded rationality model: An application to the euro area," Economics Working Papers 2012-12, Christian-Albrechts-University of Kiel, Department of Economics.
  5. Leonardo Morales-Arias & Alexander Dross, 2010. "Adaptive Forecasting of Exchange Rates with Panel Data," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 285, Quantitative Finance Research Centre, University of Technology, Sydney.
  6. Lux, Thomas, 2012. "Estimation of an agent-based model of investor sentiment formation in financial markets," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(8), pages 1284-1302.
  7. Stefan Reitz & Jan-Christoph Rülke & Georg Stadtmann, 2011. "Nonlinear Expectations in Speculative Markets - Evidence from the ECB Survey of Professional Forecasters," Kiel Working Papers 1706, Kiel Institute for the World Economy.
  8. Thomas Lux, 2013. "Inference for systems of stochastic differential equations from discretely sampled data: a numerical maximum likelihood approach," Annals of Finance, Springer, Springer, vol. 9(2), pages 217-248, May.
  9. Jean-Philippe Bouchaud, 2012. "Crises and collective socio-economic phenomena: simple models and challenges," Papers 1209.0453, arXiv.org, revised Dec 2012.
  10. Lines, Marji & Westerhoff, Frank, 2009. "Effects of inflation expectations on macroeconomic dynamics: Extrapolative versus regressive expectations," BERG Working Paper Series 68, Bamberg University, Bamberg Economic Research Group.
  11. Hohnisch, Martin & Westerhoff, Frank, 2008. "Business cycle synchronization in a simple Keynesian macro-model with socially transmitted economic sentiment and international sentiment spill-over," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 19(3), pages 249-259, September.
  12. Stefan Reitz & Jan C. Rülke & Georg Stadtmann, 2010. "Regressive Oil Price Expectations Toward More Fundamental Values of the Oil Price," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(4), pages 454-466, August.
  13. Marco D'Errico & Gulnur Muradoglu & Silvana Stefani & Giovanni Zambruno, 2014. "Opinion Dynamics and Price Formation: a Nonlinear Network Model," Papers 1408.0308, arXiv.org.

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