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

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  • 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
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    References listed on IDEAS

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    1. Winkler, Fabian, 2020. "The role of learning for asset prices and business cycles," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 42-58.
    2. 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.).
    3. Alexandre N. Kohlhas & Ansgar Walther, 2021. "Asymmetric Attention," American Economic Review, American Economic Association, vol. 111(9), pages 2879-2925, September.
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