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Are long-horizon expectations (de-)stabilizing?: theory and experiments
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Authors and Corporations: | , , , |
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Other Authors: | Hommes, Cars H. 1960- [Author] • McGough, Bruce [Author] • Salle, Isabelle [Author] |
Type of Resource: | E-Book |
Language: | English |
published: | |
Series: |
Bank of Canada: Staff working paper ; 2019, 27 (August 2019)
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Source: | Verbunddaten SWB Lizenzfreie Online-Ressourcen |
Summary: | We consider boundedly rational agents who do not plan over the infinite future but make trading plans at a finite, arbitrary horizon. We investigate the role of that horizon in the price dynamics of an asset in a Lucas tree model. We then design a laboratory experiment to test our theoretical predictions against the behaviors of human subjects. Short-horizon markets are prone to substantial and prolonged deviations from rational expectations (RE). By contrast, markets populated by even a modest share of long-horizon forecasters exhibit convergence towards the fundamental price. Longer-horizon forecasts do display more heterogeneity and thus some departure from RE; however this same heterogeneity also prevents the coordination of subjects on wrong anchors - a pattern of behavior that leads to mispricing in short-horizon markets. Long-horizon forecasts are well-described by adaptive learning, which delivers convergence to RE equilibrium, while short-horizon forecasts exhibit destabilizing trend-chasing. |
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Physical Description: | 1 Online-Ressource (circa 64 Seiten); Illustrationen |