The term structure of cross-sectional dispersion of expectations in a Learning-to-Forecast Experiment

In this paper, we present the results of a Learning-to-Forecast Experiment (LtFE) eliciting short- as well as long-run expectations about the future price dynamics in markets with positive and negative expectations feedback. Comparing our results on short-run expectations to the LtFE literature, we prove that eliciting long-run expectations neither has an impact on the price dynamics nor on short-run expectations formation. In particular, we confirm that the Rational Expectation Equilibrium (REE) is a good benchmark only for the markets with negative feedback. Interestingly, our data show that the term structure of the cross-sectional dispersion of expectations is convex in positive feedback markets and concave in negative feedback markets. Differences in the slope of the term structure stem from diverse degrees of uncertainty on the evolution of prices in the two feedback systems: (i) in the negative feedback system, the convergence of the price to the REE mirrors into a tendency for coordination of long-run expectations around the fundamental value; (ii) conversely, the instability of the REE in the positive feedback system and the resulting oscillatory price dynamics are responsible for the diverging pattern of long-run expectations. Finally, we propose a new measure of heterogeneity of expectations based on the scaling of the dispersion of expectations over the forecasting horizon.