Expectations Hypothesis Research Articles

International interest rate arbitrage: Study on a novel strategy

This study examines the time-varying excess returns in an international interest rate arbitrage (IIRA) strategy, with a particular emphasis on these excess returns. Unlike traditional carry strategies that typically match funding and investment bonds' maturities or currencies, our novel IIRA strategy is a dynamically adjusted approach involves funding with a 1-year low-yield treasury bond while investing in 2- to 10-year high-yield bonds in foreign currencies. An analysis of Sharpe ratios, foreign exchange (FX), and yield excess return shows variations in the joint expectations hypothesis of the term structure (EHTS) and the uncovered interest rate parity (UIRP) lead to profits. However, the international strategies perform worse than the domestic carry strategies. Predictive factors, such as the Cochrane–Piazzesi, show limited effectiveness due to FX volatility. Therefore, future studies should examine more predictability factors.

Mathematical Techniques for Enhancing Signal Processing in Electronics

Flag preparing is an critical portion of advanced innovation since it lets us analyze, alter, and progress information for numerous employments, from therapeutic checks to broadcast communications. With the expansion of progressed numerical strategies to information handling, electronic frameworks have gotten to be much more valuable and precise. This paper looks at a few vital numerical procedures that are utilized to move forward flag handling. It centers on calculations and hypothetical models that make flag examination and modifying way better. It is looked at how procedures like Fourier changes, wavelet changes, and measurable flag preparing can offer assistance move forward sifting, commotion diminishment, and determination. The Fourier change can break down signals into their recurrence components. This lets you are doing precise recurrence space investigation and sifting, which is exceptionally imperative for assignments that require high-frequency exactness. Wavelet changes permit for multi-resolution investigation, which makes it simpler to see at signals at diverse sizes and superior distinguish characteristics that alter or do not remain the same. Versatile sifting, expectation hypothesis, and other measurable strategies are talked approximately in terms of how they offer assistance decrease commotion and progress signals in changing settings. Utilizing these logical strategies together not as it were makes electronic frameworks work way better and be more solid, but it too opens the entryway to modern employments in ranges like machine learning and information analytics. This exposition gives an in-depth see at these numerical strategies, centering on their hypothetical establishments, how they are utilized in genuine life, and how they have changed cutting edge flag preparing. This paper looks at these strategies in awesome detail to appear how vital unused scientific thoughts are for progressing electronic flag preparing advances and making a difference to create electronic frameworks that are more brilliant and work superior.

Investigation of Expected Inflation According to Adaptive Expectations Hypothesis Using Koyck Transformation: A Study on Türkiye

Inflation expectations have been researched theoretically and practically for more than a century and continue to be a favorite research topic for economists even today. The validity of the Rational Expectations Hypothesis has not yet been proven by empirical research, and many studies show that it is invalid. This situation drew attention again to the validity of the Adaptive Expectations Hypothesis. In this study, inflation expectations for Türkiye in the 2013m6-2023m7 period, under the assumption of the Adaptive Expectations Hypothesis, were tested first by applying the Nerlove (1958) model and secondly by applying the Koyck transformation within the framework of the Friedman-Cagan model. As a result of the study, although evidence was found that the Adaptive Expectations Hypothesis is valid in Türkiye according to the Nerlove (1958) model, it was observed that there was a weak relationship between actual inflation and expected inflation. The second model was applied to avoid hesitation in accepting the hypothesis. With the Koyck transform model, it has been determined that individuals in Türkiye learn from past inflation values in forming inflation expectations. The speed of this learning is 77%. It was concluded that individuals form their inflation expectations by using 77% of current and past inflation data. The intended history includes the current period, the first and second lags. In terms of expectations, the effect of the third lag is zero.

Chronic pain patients’ evaluations of consultations: A matter of high expectations or expectations unmet?

ObjectiveThis study tests two hypotheses about spine pain patients’ expectations for consultations and their negative evaluations. High expectations may be impractical or unachievable and can set patients up for disappointment. Unmet expectations are the absolute difference between expectations before the visit and perceptions of expectations actually enacted. MethodWe conducted a single-site prospective study using pre- and post-consultation surveys. Patients (N = 200) were English-speaking individuals aged 18–75 presenting for an initial consultation for musculoskeletal pain. Analyses were conducted in SPSS v. 28.0 using mixed modeling to account for interdependence among cases. ResultsContrary to initial predictions, higher pre-consultation expectations for shared decision-making were positively linked to post-consultation satisfaction, trust, and agreement. Exceeding expectations in shared decision-making, history-taking, examination, and interpersonal skills significantly enhanced post-consultation outcomes. ConclusionsResults support the unmet expectations hypothesis over the high expectations hypothesis. Increased expectations and exceeding these expectations in key areas of patient-physician interaction were positively associated with improved consultation outcomes. Practice implicationsFindings highlight the importance of exceeding multifaceted patient expectations in physician evaluations. Yet, physicians must first understand the nature and source of each patient’s expectations pre-consultation, which vary across individuals in aspirational and realistic dimensions.

Testing rational expectations in a cointegrated VAR with structural change

The rational expectation hypothesis is widely used in finance and macroeconomics. A research question investigates whether models using this hypothesis can fit the data well. Researchers have been developing econometric procedures to test rational expectation models. Sargent and Hansen (1991) proposed how to test exact rational expectation restrictions. This study aims to achieve three objectives. The first objective is to extend Johansen and Swensen’s framework that test exact rational expectation restrictions to the case where the data-generating process is a cointegrated vector autoregressive model with abrupt structural change (CVAR-SC). The second goal is to highlight that the type of rational expectation restrictions analysed in this paper imply co-breaking, as defined by Hendry and Mizon (1998). Finally, the restrictions on the CVAR-SC parameters implied by the present value model and expectation hypothesis of the interest rate term structure are analysed, derived and tested. Three empirical exercises are reported. The first is Engsted (2002)’s dataset on share prices and dividends, the second uses a Brazilian term structure data set and the third uses a North American term structure dataset.

Behavioral economics and the nature of neoclassical paradigm

Psychological observations are by now well integrated into economics, especially in the theory of finance, as can also be seen in the Nobel Prize awarded to Thaler. On the contrary, Simon’s attempt to reforge economic theory on the paradigm of bounded rationality failed. Starting from the birth of the neoclassical paradigm, we’ll describe the attempt to give it psychological foundations with a direct measurement of utility, then the axiomatic turn of the paradigm and its first anomalies. We’ll then sum up the debate on rationality, taking place in the group of economists led by Simon, which brought to the rational expectations hypothesis. Finally, we’ll discuss the development of behavioral economics and its progressive acceptance in economic theory. This historical reconstruction allows us to understand the actual hard core of the neoclassical paradigm and the growing need of the paradigm for practical flexibility that determines how to choose arguments, methods and evidence that can be useful to its development, including psychological ones.

Psychological mechanisms underlying ingroup favouritism in cooperation: Revisiting the reputation management and expectation hypotheses

According to the theory of bounded generalized reciprocity (BGR), intergroup contexts afford individuals the assumption that indirect reciprocity is bounded by group membership, and this shapes ingroup favouritism in cooperation. The assumption of bounded indirect reciprocity is hypothesized to result in ingroup favouritisms via two pathways: it leads people to behave in ways that earn and maintain a positive reputation in the eyes of ingroup, but not outgroup, members (the reputation management hypothesis), and it leads individuals to expect other ingroup members to be more cooperative than outgroup members (the expectation hypothesis). In other words, BGR offers two parallel psychological explanations for why people display ingroup favouritism. While the latter hypothesis has gained much experimental support, evidence for the former is rather scarce. Here, we report a direct test of both the reputation management hypothesis and the expectation hypothesis using two economic games. Overall, we found support for the expectation hypothesis, but not for the reputation management hypothesis.

From coordination devices to coordination failures: on the changing epistemology of sunspots since the 1970s

The widespread adoption of the rational expectations hypothesis in macroeconomic literature from the 1970s onwards has often overlooked the issue of coordinating individual decisions, particularly regarding expectations. How is common knowledge, essential for rational expectations equilibrium, established? When common knowledge supports multiple equilibria, how do expectations converge to a specific one? These pivotal questions have always been at the core of sunspot literature, which emerged at the turn of the 1980s, albeit sometimes implicitly. While unspots were initially regarded by pioneers David Cass and Karl Shell as essential coordination devices, their epistemological status evolved with the introduction of competing models in ndogenous fluctuations (chaos, bifurcations, deterministic cycles) and the transition from the overlapping generations to the infinitely lived agent framework. Ultimately identified as anticipation shocks, sunspots were portrayed as instability triggers and markers of coordination failures. However, recent advancements in sunspot theory, especially in the areas of financial crises and experimental economics, have started to rehabilitate the original interpretation of sunspots as coordination mechanisms. This article maps out the historical development, shedding light on the evolving concepts surrounding sunspots.

Which Subjective Expectations Explain Asset Prices?

Abstract We present a method for determining whether errors in expectations explain asset pricing puzzles without imposing assumptions about the error mechanism. Using accounting identities and survey forecasts, we find that errors in expected long-term inflation explain price variation, return predictability, and the rejection of the expectations hypothesis for aggregate stock and bond markets. Errors in short-term (long-term) nominal earnings growth expectations explain (do not explain) stock price variation and return predictability. The relevant errors are consistent with mistakes about the persistence of forecasted variables and the response to surprises. A simple framework based on fundamental extrapolation successfully replicates these findings. (JEL G40, G12, G14, E71)

Монетарные сюрпризы и временная структура процентных ставок: идентификация посредством гетероскедатичности

How does an unexpected change in the Bank of Russia key rate affect the bond market? This article quantifies the impact of monetary surprises on government bond yields of various maturities. To estimate the causal effect with the joint dynamics of the key rate and bond yields (that is, to solve the problem of endogenous bias), we use the heteroscedasticity-driven identification method that requires weaker assumptions than other alternative methods used in the literature. The results confirm the significant impact of monetary policy surprises on the interest rate term structure, with a greater effect on short-term rates. In contrast to previous studies, the behavior of long-term rates is consistent with the expectations hypothesis: risk premia do not respond significantly to a monetary shock.

Is There Hope for the Expectations Hypothesis?

Is There Hope for the Expectations Hypothesis?

On the Bias of the Unbiased Expectation Theory

The unbiased expectation theory stipulates that long-term interest rates are determined by the market’s expectations of future short-term interest rates. According to this hypothesis, if investors have unbiased expectations about future interest rate movements, the forward interest rates should be good predictors of future spot interest rates. This hypothesis of the term structure of interest rates has long been a subject of debate due to empirical and theoretical challenges. Despite extensive research, a satisfactory explanation for the observed systematic difference between future spot interest rates and forward interest rates has not yet been identified. In this study, we approach this issue from an arbitrage theory perspective, leveraging on the connection between the expectation hypothesis and changes in probability measures. We propose that the observed bias can be explained by two adjustments: a risk premia adjustment, previously considered in the literature, and a stochastic adjustment that has been overlooked until now resulting from two measure changes. We further demonstrate that for specific instances of the Vasicek and Cox, as well as the Ingersoll and Ross, stochastic interest rate models, quantifying these adjustments reveals that the stochastic adjustment plays a significant role in explaining the bias, and ignoring it may lead to an overestimation of the required risk premia/aversion adjustment. Our findings extend beyond the realm of financial economic theory to have tangible implications for interest rate modelling. The capacity to quantify and distinguish between risk and stochastic adjustments empowers modellers to make more informed decisions, leading to a more accurate understanding of interest rate dynamics over time.

Peculiarity of Behavior of Economic Agents under Cognitive Constraints in a Semi-Open New Keynesian Model

The aim of the paper is to analyze changes and peculiarities of behavior of economic agents with bounded rationality in the New Keynesian model, in which imported equipment and technology are one of the factors of production, and households consume only domestic products. The formation of output gap and inflation expectations by agents is based on stationary values of these variables and on extrapolation of the latest available data on inflation and the output gap. The weight shares of agents applying these rules change endogenously. Histograms of the frequency distribution of the degree of buoyancy and the impulse responses of monetary policy shocks and technology shocks to the variables under study show that a less open economy tends to go through an economic cycle with a smaller amplitude than a more rigid economy. Analyses of the trade-offs between the volatility of inflation and the output gap at different parameter values in the Taylor rule show their non-linear nature (in contrast to standard models with rational expectations). An important result obtained in this analysis is that the rational expectations hypothesis is more consistent with a closed economy than with an open one.

Do Changes in Risk Perception Predict Systemic Banking Crises?

This paper examines if incorporating changes in financial market risk perception improves the predictive power of an early-warning system for systemic banking crises. In explaining systemic banking crises, the existing literature identifies inflating stock and real estate bubbles, credit booms, and surges in net capital inflows as the common drivers. Employing panel logit models to predict the postwar systemic banking crises in advanced economies to occur within three–four years, the paper’s key finding is that, even after controlling for the effects of surges in asset and credit markets and net capital inflows that are above the long-run trends for an extended period, market participants’ increasing underestimation of downside risks is a significant predictor of these crises. Incorporating changes in risk perception improves the prediction accuracy of the model significantly. This finding is robust across alternative prediction horizons, systemic crisis definitions, and risk-perception measures. Consistent with the recent theoretical developments in the form of the diagnostic expectations hypothesis for financial markets, the interpretation is that recent recurring good news about financial markets and the broader economic trends for sufficiently long periods lead to growing neglect of tail risks and riskier financial transactions, raising systemic risk and the likelihood of a financial crisis. The finding suggests monitoring financial market risk perception, in addition to the conventional indicators, to predict and avert systemic banking crises.

Functional Cointegration Test for Expectation Hypothesis of the Term Structure of Interest Rates in China

Functional Cointegration Test for Expectation Hypothesis of the Term Structure of Interest Rates in China

Spatiotemporal expectations of apparent motion and the effect of attentional control

An experimental investigation was conducted on whether and how temporal expectation influences visual processing in moving objects, while also considering the role of attention control. Data on reaction times were collected as outcome measures from two behavioural experiments. In experiment 1, participants (n = 36) were asked to monitor the movement of an object until its disappearance and respond quickly when it reappeared. The trajectory of an object before its disappearance generates expectations regarding the position and/or timing of its subsequent reappearance. Results revealed that all states of expectation significantly shortened reaction times compared with no expectation. In experiment 2, participants (n = 34) performed the same reaction time task while simultaneously engaging in a working memory task, which comprised memorising a string of characters. Results indicated that there is no difference in reaction times between the only temporal expectation and no expectation. Taken together, these results provide evidence to suggest that participants could predict the location and/or timing of target onset based on rhythmic moving objects, and that a secondary cognitive task impaired temporal expectation. These findings support the temporal expectation hypothesis regarding moving objects requiring attentional control resources.

A study of Fisher Effect in India.

In this paper, the relationship between nominal interest rate and inflation is analyzed based on Fisher Effect (FE) theory. As per FE theory, the difference between nominal interest rate and expected inflation is equal to real interest rate. The theory proposes that a rise in expected inflation can lead to positive impact on nominal interest rate when the real interest rate is constant. For analyzing FE, the inflation rate measures based on Core index, Wholesale Price Index (WPI) and Consumer Price Index (CPI) are considered. As per rational expectation hypothesis, the one-period-ahead inflation rate is considered as expected inflation (eInf). The interest rates (IR) associated with call money, treasury bills of 91- and 364-day maturities are considered. The study uses ARDL bounds testing approach and Granger causality test for analyzing the long-run relationship between eInf and IR. The study finds evidence for presence of cointegrating relationship between eInf and IR in India. Contrary to FE theory, the long-run relation between eInf and IR is found to be negative. The extent and significance of long-run relationship varies depending on measures of eInf and IR considered. Along with cointegration, the expected WPI inflation and interest rate measures also exhibit Granger causality in at least one direction. Although, the cointegration is not observed between expected CPI and IR, there exists Granger causality between these variables. This increasing disconnect between eInf and IR could be attributed to adoption of flexible inflation targeting framework, pursual of additional objectives by monetary authority, different sources and types of inflation, etc.

The Uncanny Valley Effect and Induced Compensatory Consumption Behavior in Language Conditions

With the gradually widespread use of personification marketing, there is the phenomenon with extensive attention, the uncanny valley effect, that people ' s familiarity for robots decreases sharply with the increase of personification degree, further leading to compensatory consumption behavior based on the self-discrepancy theory and cause the illusion of 'marketing success'. This paper theoretically explores the essence of violation expectations as the uncanny valley effect, and designs a simulation scene experiment in which subjects make consumption decisions in different personification situations in the stimulation of language materials, so as to study the familiarity and compensatory consumption curves under different violation expectations. The results show that under the stimulation of language conditions, there is a familiarity curve similar to the uncanny valley effect and complementary compensatory consumption curve, and the threshold is calculated by fitting curve, within which the familiarity is the lowest and the compensatory consumption is the highest. The results provide empirical evidence to prove the violation of expectation hypothesis, and prove that there is also the uncanny valley effect in the language channel, and the threshold provides guidance for the development of artificial intelligence enterprises.

The Timing of Technology Adoption in Network Industries

This paper analyzes the effect of network externalities on firms’ timing of new technology adoption in a network industry. In a pre-commitment game under Cournot competition, network effects tend to accelerate the timing of the leader and the follower regarding their adoption dates: under the rational expectations hypothesis and also under the firms’ output commitment. However, while an increase in network effects tends to reduce the discrepancy between the optimal social timing of the new technology adoption and the market-driven time of adoption in the rational expectations model, the opposite occurs under the output commitment game.

The Term Structure of Short Selling Costs

Abstract Short sellers care about (i) how overvalued an asset is and (ii) when the overvaluation will be corrected. Hence, short selling costs should be higher over horizons when negative information is more likely to arrive. This article presents a model formalizing this intuition and tests the model using the put–call parity condition. Forward shorting costs predict future costs and stock returns, consistent with an expectations hypothesis in the shorting market. Additionally, an upward sloping term structure around earnings announcements increases the probability of a negative earnings surprise, evidence that short selling costs are higher over horizons when negative information is more likely to arrive. My findings suggest that the term structure of short selling costs conveys how long overpricings are expected to persist.