IDEAS home Printed from https://ideas.repec.org/p/oxf/wpaper/1076.html
   My bibliography  Save this paper

Overreaction and Forecast Horizon: Longer-term Expectations Overreact More, Shorter-term Expectations Drive Fluctuations

Author

Listed:
  • Basil Halperin
  • J. Zachary Mazlish

Abstract

We use survey data on macroeconomic expectations, across 89 countries and going back to 1989, to establish four facts about how forecast biases depend on the time horizon of the forecast. The data cover average expectations and horizons from 0 to 10 years. (1) Expectations underreact at a horizon of one year or less. (2) Expectations overreact at horizons of two years or more. (3) Expectations are “too extreme” at all horizons. (4) Overreaction and over-extremity increase with forecast horizon. These four patterns hold across advanced and emerging economies, and across multiple macroeconomic variables. They are inconsistent with several popular models of overreaction, where the degree of overreaction is independent of forecast horizon. Finally, although long-term expectations exhibit stronger overreaction, it is short-term expectations that are most strongly associated with fluctuations in GDP, investment, and the stock market.

Suggested Citation

  • Basil Halperin & J. Zachary Mazlish, 2025. "Overreaction and Forecast Horizon: Longer-term Expectations Overreact More, Shorter-term Expectations Drive Fluctuations," Economics Series Working Papers 1076, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:1076
    as

    Download full text from publisher

    File URL: https://ora.ox.ac.uk/objects/uuid:bec5c4b4-7316-4cc3-ab76-b0c4d1813173
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kenneth Eva & Fabian Winkler, 2023. "A Comprehensive Empirical Evaluation of Biases in Expectation Formation," Finance and Economics Discussion Series 2023-042, Board of Governors of the Federal Reserve System (U.S.).
    2. Winkler, Fabian, 2020. "The role of learning for asset prices and business cycles," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 42-58.
    3. Alexandre N. Kohlhas & Ansgar Walther, 2021. "Asymmetric Attention," American Economic Review, American Economic Association, vol. 111(9), pages 2879-2925, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Born, Benjamin & Enders, Zeno & Müller, Gernot J., 2023. "On FIRE, news, and expectations," Working Papers 42, German Research Foundation's Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour", Humboldt University Berlin.
    2. Adam, Klaus & Merkel, Sebastian, 2019. "Stock price cycles and business cycles," Working Paper Series 2316, European Central Bank.
    3. Chen, Heng & Li, Xu & Pei, Guangyu & Xin, Qian, 2024. "Heterogeneous overreaction in expectation formation: Evidence and theory," Journal of Economic Theory, Elsevier, vol. 218(C).
    4. Adam, Klaus & Pfäuti, Oliver & Reinelt, Timo, 2025. "Subjective housing price expectations, falling natural rates, and the optimal inflation target," Journal of Monetary Economics, Elsevier, vol. 149(C).
    5. Jean-Paul L’Huillier & Sanjay R Singh & Donghoon Yoo, 2024. "Incorporating Diagnostic Expectations into the New Keynesian Framework," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(5), pages 3013-3046.
    6. Caines, Colin & Winkler, Fabian, 2021. "Asset price beliefs and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 53-67.
    7. Benjamin Born & Zeno Enders & Manuel Menkhoff & Gernot J. Müller & Knut Niemann & Gernot Müller, 2022. "Firm Expectations and News: Micro v Macro," CESifo Working Paper Series 10192, CESifo.
    8. repec:zbw:bofrdp:2022_005 is not listed on IDEAS
    9. Adams, Jonathan J., 2023. "Moderating noise-driven macroeconomic fluctuations under dispersed information," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    10. Han, Zhao, 2024. "Asymmetric information and misaligned inflation expectations," Journal of Monetary Economics, Elsevier, vol. 143(C).
    11. Maenhout, Pascal J. & Vedolin, Andrea & Xing, Hao, 2025. "Robustness and dynamic sentiment," Journal of Financial Economics, Elsevier, vol. 163(C).
    12. Ferroni, Filippo & Fisher, Jonas D.M. & Melosi, Leonardo, 2024. "Unusual shocks in our usual models," Journal of Monetary Economics, Elsevier, vol. 147(C).
    13. Abay, Kibrom A. & Barrett, Christopher B. & Kilic, Talip & Moylan, Heather & Ilukor, John & Vundru, Wilbert Drazi, 2023. "Nonclassical measurement error and farmers’ response to information treatment," Journal of Development Economics, Elsevier, vol. 164(C).
    14. Gemmi, Luca, 2024. "Rational overoptimism and limited liability," Journal of Monetary Economics, Elsevier, vol. 143(C).
    15. Colin C. Caines & Fabian Winkler, 2018. "Asset Price Learning and Optimal Monetary Policy," International Finance Discussion Papers 1236, Board of Governors of the Federal Reserve System (U.S.).
    16. Iliopulos, Eleni & Perego, Erica & Sopraseuth, Thepthida, 2021. "International business cycles: Information matters," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 19-34.
    17. Caines, Colin, 2020. "Can learning explain boom-bust cycles in asset prices? An application to the US housing boom," Journal of Macroeconomics, Elsevier, vol. 66(C).
    18. Babiak, Mykola & Kozhan, Roman, 2024. "Parameter learning in production economies," Journal of Monetary Economics, Elsevier, vol. 144(C).
    19. Andrew Y. Chen & Rebecca Wasyk & Fabian Winkler, 2017. "A Likelihood-Based Comparison of Macro Asset Pricing Models," Finance and Economics Discussion Series 2017-024, Board of Governors of the Federal Reserve System (U.S.).
    20. Katsuhiro Oshima, 2021. "Heterogeneous beliefs, monetary policy, and stock price volatility," Annals of Finance, Springer, vol. 17(1), pages 79-125, March.
    21. Meggiorini, Greta, 2023. "Behavioral New Keynesian Models: An empirical assessment," Journal of Macroeconomics, Elsevier, vol. 77(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:1076. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen The email address of this maintainer does not seem to be valid anymore. Please ask Anne Pouliquen to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.