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Modeling the Dynamics of EU Economic Sentiment Indicators: An Interaction-Based Approach

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  • Jaba Ghonghadze
  • Thomas Lux

Abstract

This paper estimates a simple univariate model of expectation or opinion formation in continuous time adapting a ‘canonical’ stochastic model of collective opinion dynamics (Weidlich and Haag, 1983; Lux, 1995, 2007). This framework is applied to a selected data set on survey-based expectations from the rich EU business and consumer survey database for twelve European countries. The model parameters are estimated through maximum likelihood and numerical solution of the transient probability density functions for the resulting stochastic process. The model's performance is assessed with respect to its out-of-sample forecasting capacity relative to univariate time series models of the ARMA(p; q) and ARFIMA(p; d; q) varieties. These tests speak for a slight superiority of the canonical opinion dynamics model over the alternatives in the majority of cases

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File URL: https://www.ifw-members.ifw-kiel.de/publications/modeling-the-dynamics-of-eu-economic-sentiment-indicators-an-interaction-based-approach/KWP_1487_LuxGhonghadze_EUSentiment.pdf
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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1487.

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Length: 39 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:kie:kieliw:1487

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Related research

Keywords: expectation formation; survey-based expectations; opinion dynamics; Fokker-Planck equation; forecasting;

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References

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  1. Vuchelen, Jef, 1995. "Political events and consumer confidence in Belgium," Journal of Economic Psychology, Elsevier, vol. 16(4), pages 563-579, December.
  2. Zullow, Harold M., 1991. "Pessimistic rumination in popular songs and newsmagazines predict economic recession via decreased consumer optimism and spending," Journal of Economic Psychology, Elsevier, vol. 12(3), pages 501-526, September.
  3. Alfarano, Simone & Lux, Thomas, 2005. "A noise trader model as a generator of apparent financial power laws and long memory," Economics Working Papers 2005,13, Christian-Albrechts-University of Kiel, Department of Economics.
  4. Lemmens, Aurelie & Croux, Christophe & Dekimpe, Marnik G., 2005. "On the predictive content of production surveys: A pan-European study," International Journal of Forecasting, Elsevier, vol. 21(2), pages 363-375.
  5. William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, 07.
  6. Acemoglu, Daron & Scott, Andrew, 1994. "Consumer Confidence and Rational Expectations: Are Agents' Beliefs Consistent with the Theory?," Economic Journal, Royal Economic Society, vol. 104(422), pages 1-19, January.
  7. Michela Nardo, 2003. "The Quantification of Qualitative Survey Data : A Critical Assessment," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 645-668, December.
  8. Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November.
  9. Christopher D. Carroll, 2003. "Macroeconomic Expectations Of Households And Professional Forecasters," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 269-298, February.
  10. Bob McNabb & Karl Taylor, 2002. "Business Cycles and the Role of Confidence: Evidence from Europe," Discussion Papers in Economics 02/3, Department of Economics, University of Leicester.
  11. Miquel Clar & Juan-Carlos Duque & Rosina Moreno, 2007. "Forecasting business and consumer surveys indicators-a time-series models competition," Applied Economics, Taylor & Francis Journals, vol. 39(20), pages 2565-2580.
  12. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  13. Charles Delorme & David Kamerschen & Lisa Ford Voeks, 2001. "Consumer confidence and rational expectations in the United States compared with the United Kingdom," Applied Economics, Taylor & Francis Journals, vol. 33(7), pages 863-869.
  14. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
  15. John M. Roberts, 1998. "Inflation expectations and the transmission of monetary policy," Finance and Economics Discussion Series 1998-43, Board of Governors of the Federal Reserve System (U.S.).
  16. Sarah Gelper & Aurelie Lemmens & Christophe Croux, 2007. "Consumer sentiment and consumer spending: decomposing the Granger causal relationship in the time domain," Applied Economics, Taylor & Francis Journals, vol. 39(1), pages 1-11.
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Cited by:
  1. Thomas Lux, 2007. "Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey," Working Papers wp07-11, Warwick Business School, Finance Group.

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