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Expectations and Investment
TLDR
This paper found that corporate investment plans as well as actual investment are well explained by CFOs' expectations of earnings growth, which is not subsumed by traditional variables, such as Tobin's Q or discount rates.Abstract:
Using micro data from the Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well as actual investment are well explained by CFOs' expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin's Q or discount rates. We also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to the extrapolative structure of expectations and suggesting that expectations may not be rational. This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behaviour.read more
Citations
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A Theory of Demand Shocks
TL;DR: In this paper, the authors present a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity, which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy.
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The formation of expectations, inflation, and the Phillips curve
TL;DR: The authors argue for a careful re-consideration of the expectations formation process and a more systematic inclusion of real-time expectations through survey data in macroeconomic analyses, using the New Keynesian Phillips curve as an extensive case study.
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Over-reaction in Macroeconomic Expectations
TL;DR: The authors study the rationality of individual and consensus professional forecasts of macroeconomic and financial variables using the methodology of Coibion and Gorodnichenko (2015), which examines predictability of forecast errors from forecast revisions.
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Diagnostic Expectations and Credit Cycles
TL;DR: In this paper, a model of credit cycles arising from diagnostic expectations is presented, in which agents over-estimate future outcomes that have become more likely in light of incoming data.
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Survey Measurement of Probabilistic Macroeconomic Expectations: Progress and Promise
TL;DR: For example, this article found that persons have probabilistic expectations for uncertain events, yet empirical research measuring expectations was long rare, due to the inhibition against collection of expe...
References
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Book
Judgment Under Uncertainty: Heuristics and Biases
Amos Tversky,Daniel Kahneman +1 more
TL;DR: The authors described three heuristics that are employed in making judgements under uncertainty: representativeness, availability of instances or scenarios, and adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available.
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Another look at the instrumental variable estimation of error-components models
Manuel Arellano,Olympia Bover +1 more
TL;DR: In this paper, a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables is presented. But the authors do not consider models with predetermined variables that have constant correlation with the effects.
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Noise Trader Risk in Financial Markets
TL;DR: In this article, the authors present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns.
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Rational Expectations and the Theory of Price Movements
TL;DR: In this article, the Stockholm School hypothesis is used to explain how expectations are formed in the context of an isolated market with a fixed production lag, and commodity speculation is introduced into the system.
Posted Content
By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
TL;DR: In this paper, a consumption-based model is proposed to explain a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-term horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.
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