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New Tests of Expectation Formation with Applications to Asset Pricing Models

Author

Listed:
  • Pei Kuang

    (University of Birmingham)

  • Renbin Zhang

    (Universitat Autonoma de Barcelona (UAB) and Barcelona GSE)

  • Tongbin Zhang

    (Shanghai University of Finance and Economics (SUFE))

Abstract

We show unit root econometrics can be fruitfully employed to analyze expectations data and test expectation formation in financial and macroeconomic models with different informational assumptions. Survey data suggests stock price forecasts are not cointegrated with consumption forecasts and rejects this aspect of the formation of stock price expectations in a wide range of asset pricing models. The evidence casts some doubt on the modeling of expectation formation in asset pricing models which assume agents possess the knowledge of the equilibrium pricing function. Relaxing this knowledge appears necessary for models to reconcile the survey evidence and potential resolutions are discussed.

Suggested Citation

  • Pei Kuang & Renbin Zhang & Tongbin Zhang, 2019. "New Tests of Expectation Formation with Applications to Asset Pricing Models," Discussion Papers 19-05, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:19-05
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    References listed on IDEAS

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    More about this item

    Keywords

    Survey Expectation; Cointegration; Sentiment; Learning; Heterogeneous Beliefs;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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