Rational Beliefs or Distorted Beliefs: Equity Premium Puzzle and Micro Survey Data
AbstractThis paper examines whether the Sharpe ratios constructed from survey forecasts are favorable to the rational approach or the irrational approach in explaining the equity premium puzzle. T-tests, bias tests, and structural break tests for the bias are conducted for the examination. The results appear more favorable to the irrational approach. The average Sharpe ratios constructed from the Livingston survey forecasts lie within the Hansen-Jagannathan bound in most cases. Almost all individual economists have significant biases in forecasts. Furthermore, those biases seem to vary over the business cycle, which is consistent with a seemingly ad hoc assumption in the irrational approach.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0303.
Length: 30 pages
Date of creation: May 2003
Date of revision:
Survey forecasts; Rational expectation; Habit formation; Distorted beliefs; T-tests; Bias tests;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-05-15 (All new papers)
- NEP-CBE-2003-05-15 (Cognitive & Behavioural Economics)
- NEP-CFN-2003-05-15 (Corporate Finance)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Alain Abou & Georges Prat, 1986. "Ex-ante risk premia in the US stock market: analysing experts' behaviour at the individual level," Post-Print halshs-00172883, HAL.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.