Working Paper

Heterogeneous Forecasters and Nonlinear Expectation Formation in the U.S. Stock Market

Authors

  • Christian Pierdzioch
  • Stefan Reitz
  • Jan-Christoph Ruelke
Publication Date

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.

Info

JEL Classification
G17, E47, C53

Key Words

  • heterogeneous agents
  • non-linear expectation formation
  • stock market
  • survey data