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.
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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; Trading Volume; Bond Interest Rates
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)
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- 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.
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