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Are long-horizon expectations (de-)stabilizing?: theory and experiments

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Authors and Corporations: Evans, George W. (Author), Hommes, Cars H. (Author), McGough, Bruce (Author), Salle, Isabelle (Author)
Other Authors: Hommes, Cars H. 1960- [Author] • McGough, Bruce [Author] • Salle, Isabelle [Author]
Type of Resource: E-Book
Language: English
published:
[Ottawa] Bank of Canada [2019]
Series: Bank of Canada: Staff working paper ; 2019, 27 (August 2019)
Source: Verbunddaten SWB
Lizenzfreie Online-Ressourcen
Description
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.
Physical Description: 1 Online-Ressource (circa 64 Seiten); Illustrationen