Over/Under-reaction and Judgment Noise in Expectations Formation

Seminar summary

In forecast surveys of aggregate variables, there’s a positive consensus-level correlation between forecast errors and revisions, but a negative individual-level correlation. Previous studies view this as aggregate-level underreaction and individual-level overreaction. However, I propose that noise in predictive judgment explains this discrepancy. A stylized model demonstrates that a negative individual-level coefficient doesn’t necessarily indicate overreaction. By estimating a structural parameter for over-/underreaction, the results suggest consistent underreaction, irrespective of whether the model matches individual or aggregate-level correlation coefficients. I illustrate the implication of the estimated underreaction in a permanent income hypothesis model.

How to attend this seminar

This seminar will take place online on Wednesday 22 May 2024 at 2pm.

It is free to attend and we ask that you contact the organiser Dr Anna Sarkisyan for the zoom link.

Speaker bio

Dr Junyi Liao

Junyi Liao is a Lecturer in Finance at Essex Business School He obtained a PhD in Economics from LSE in 2023. His current research interest is behavioural economics and finance, specifically expectations formation, and its macroeconomic and financial implications.