Measuring Biases in Expectation Formation

Arbeitspapier

We develop a general framework for measuring biases in expectation formation. The method is based on the insight that biases can be inferred from the response of forecast errors to past news. Empirically, biases are measured by flexibly estimating the impulse response function of forecast errors. The framework does not require precise knowledge of the true data-generating process, and it nests all major existing models of expectations. Monte Carlo simulations show that the method is able to detect biases in empirically relevant settings. We illustrate the methodology using data on inflation forecasts. Our framework can guide future models of expectations.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. TI 2018-058/IV

Classification and Topics

• Classification: Wirtschaft ; Forecasting Models; Simulation Methods ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Expectations; Speculations ; Macro-Based Behavioral Economics: General‡ ; Behavioral Finance: General‡
• Subject: expectation formation ; bias ; underreaction ; overreaction

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Peters, Florian ; Kucinskas, Simas
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/185577
• Last update: 10.03.2025, 11:42 AM CET