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Nonlinear expectation formation in the U.S. stock market: Empirical evidence from the Livingston survey

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  • Pierdzioch, Christian
  • Reitz, Stefan
  • Ruelke, Jan-Christoph

Abstract

We use a Panel Smooth Transition Regression (STR) model to study nonlinearities in the expectation-formation process in the U.S. stock market. To this end, we use data from the Livingston survey to investigate how the importance of regressive and extrapolative expectations fluctuates over time as market conditions summarized by stock-market misalignments and recent returns change. We find that survey participants form stabilizing expectations in the long run. Short-run expectations, in contrast, are consistent with weak mean reversion of stock prices.

Suggested Citation

  • Pierdzioch, Christian & Reitz, Stefan & Ruelke, Jan-Christoph, 2015. "Nonlinear expectation formation in the U.S. stock market: Empirical evidence from the Livingston survey," Kiel Working Papers 1947 [rev.], Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1947r
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    More about this item

    Keywords

    Non-linear expectation formation; Survey data; Stock market; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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