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Inferential Expectations

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Author Info
Gordon Menzies () (School of Finance and Economics, University of Technology, Sydney)
Daniel John Zizzo (University of East Anglia)

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Abstract

We propose that the formation of beliefs be treated as statistical hypothesis tests, and we label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, agents are assumed to switch to the rational expectation. Rational expectations are shown to be a special (limiting) case of inferential expectations, with the test size a becoming a metric for rationality. When inferential expectations are built into a Dornbusch-style model of the exchange rate, regression tests of Uncovered Interest Parity and the rational expectations version of the term structure both display downward bias in the slope coefficient. We present the results of an experiment that supports inferential expectations.

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Publisher Info
Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 159.

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Length: 40
Date of creation: 01 May 2005
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Handle: RePEc:uts:rpaper:159

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Related research
Keywords: expectations; macroeconomics; rationality; uncovered interest parity; term structure; exchange rate;

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gordon D. Menzies & Daniel John Zizzo, 2005. "Inferential Expectations," CAMA Working Papers 2005-12, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
    Other versions:
  2. Gordon Menzies & Daniel Zizzo, 2008. "News And Expectations In Financial Markets: An Experimental Study," CAMA Working Papers 2008-34, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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