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Asset pricing with expectation shocks

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  • Elias, Christopher J.

Abstract

This paper adds persistent shocks into the adaptive learning expectation formation process in stochastic growth asset pricing production and endowment economies. These expectation shocks, designed to capture psychological elements which can arise from news, changes in sentiment, herding and bandwagon effects, generate waves of optimism and pessimism in equity price forecasts. The paper estimates parameters of the expectation shock and adaptive learning process with the method of simulated moments, and compares simulation results to U.S. economic and financial market stylized facts. Numerical results for both the estimated production and endowment economies show that the expectation shock model matches several of the stylized facts better than does a model that assumes rational expectations or adaptive learning alone.

Suggested Citation

  • Elias, Christopher J., 2016. "Asset pricing with expectation shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 68-82.
    • Handle: RePEc:eee:dyncon:v:65:y:2016:i:c:p:68-82
    DOI: 10.1016/j.jedc.2016.02.005
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    Cited by:

    1. Jia, Fei & Shen, Yao & Ren, Junfan & Xu, Xiangyun, 2021. "The impact of offshore exchange rate expectations on onshore exchange rates: The case of Chinese RMB," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    2. Xu, Xin & Xu, Xiaoguang, 2023. "Monetary policy transmission modeling and policy responses," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    3. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.
    4. Elias, Christopher J., 2016. "A heterogeneous agent exchange rate model with speculators and non-speculators," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 203-223.
    5. Sangram Keshari Jena & Aviral Kumar Tiwari & Ashutosh Dash & Emmanuel Joel Aikins Abakah, 2021. "Volatility Spillover Dynamics between Large-, Mid-, and Small-Cap Stocks in the Time-Frequency Domain: Implications for Portfolio Management," JRFM, MDPI, vol. 14(11), pages 1-22, November.

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    More about this item

    Keywords

    Asset pricing; Adaptive learning; Expectations formation; Expectation shocks;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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