Expectations Of Future Prices Research Articles

Gender Differences in Inflation Expectations: Recent Evidence from India

This study investigates gender disparities in inflation expectations in India using data from the Reserve Bank of India’s Households’ Inflation Expectations Survey (March 2011 to September 2022). To determine these differences, the authors analyze the expectations of future prices for various categories including food products, nonfood products, household durables, housing, and general prices for both a short-term horizon (the next three months) and a long-term horizon (one year ahead). The authors employ independent sample t test, ordinary least square (OLS) regression, and ordinal logistic regression (OLOGIT) models to assess the average inflation expectations disparities between genders. The results demonstrate a significant relationship between gender and inflation expectations, with the findings indicating that, on average, females exhibit higher inflation expectations compared to males.

The impact of dividend policy on share price volatility: Evidence from listed companies in Gulf Cooperation Council countries

The volatility of share prices is of high importance to investors since it formulates the investment strategies that should be followed or even helps in deciding the right time and company to be selected for investment purposes. The Gulf Cooperation Council (GCC) investors should find this empirical study of high importance since it will highlight the main company characteristics that should be taken into consideration when formulating the expectations of future share prices. This study examines the impact of dividend policies on share price volatility, focusing on non-financial companies of GCC countries that were listed between 2010 and 2021. All non-financial companies (532) listed in Saudi Arabia, Oman, Qatar, the UAE, Kuwait, and Bahrain were collected but 380 companies were excluded due to unavailable data set for the period of study. The panel regression is used to test the impact (fixed and random effects techniques) but the Hausman test favored the fixed effects results. The dependent variable is share price volatility, while the independent variable is the dividend yield, which serves as a stand-in for dividend policy. The relationship between share price volatility and a set of controls, including size, growth, and leverage, is also examined in this paper. According to the results, size and leverage have a significant negative relationship with share price volatility, but growth has an insignificant positive impact. Dividend policy has no impact on share price volatility. In other words, dividend policy does not fluctuate share prices in GCC.

The Influence of the COVID-19 on Hong Kong Housing Price

This article mainly discusses the impact of the epidemic on housing prices in Hong Kong. Today, COVID-19 is still a pandemic with a high impact on a global scale, affecting people's lives in many ways. Compared with before the epidemic, Hong Kong housing prices have a certain downward trend. The purpose of this study is to explore the proportion of the epidemic and the factors that are mainly affected by the epidemic. Through the correlation analysis and regression analysis of the house price index, the price index and the impact of real estate investment, it is found that the negative impact of the current epidemic on housing prices is relatively obvious, and its impact is gradually analyzed. Finally, it is concluded that the epidemic affects the supply and demand of real estate by affecting the number of people, and ultimately affects housing prices. However, because the government and real estate developers have introduced corresponding policies to deal with the epidemic, it is difficult for the future house price expectations to be significantly reduced.

Buyer behaviour and price expectations: a spatial analysis of the Athens residential market

PurposeThis paper examines the price setting behaviour over time and space in the Athens residential market. In periods of house price inflation asking prices are often based upon the last observed highest selling price achieved for a similar property in the same micro-location. However, in a falling market, prices may be rigid downwards and less sensitive to the most recent transaction prices, weakening spatial effects. Furthermore, the paper considers whether future price expectations affect price setting behaviour.Design/methodology/approachThe paper employs a dataset of approximately 24,500 property values from 2007 until 2014 in Athens incorporating characteristics and locational variables. The authors begin by estimating a baseline hedonic price model using property characteristics, neighbourhood amenities and location effects. Following this, a spatio-temporal autoregressive (STAR) model is estimated. Running separate models, the authors account for spatial dependence from historic valuations, contemporaneous peer effects and expectations effects.FindingsThe initial STAR model shows significant spatial and temporal effects, the former remaining important in a falling market contrasting with previous literature findings. In the second STAR model, whilst past sales effects remain significant although smaller, contemporaneous and price expectations effects are also found to be significant, the latter capturing anchoring and slow adjustment heuristics in price setting behaviour.Research limitations/implicationsAs valuations used in the database are based upon comparable sales, then in the recessionary periods covered in the dataset, finding comparables may have become more difficult, and hence this, in turn, may have impacted on valuation accuracy.Practical implicationsIn addition to past effects, contemporaneous transactions and expected future values need to be taken in consideration in analysing spatial interactions in housing markets. These factors will influence housing markets in different cities and countries.Social implicationsThe information content of property valuations should more carefully consider the relative importance of different components of asking prices.Originality/valueThis is the first paper to use transactions data over a period of falling house prices in Athens and to consider current and future values in addition to past values in a spatio-temporal context.

The relative pricing of WTI and Brent crude oil futures: Expectations or risk premia?

This paper studies the spread of Brent-WTI futures prices using a no-arbitrage term structure model with one common and two latent idiosyncratic risk factors. We document more negative risk premia for WTI than for Brent, and the differences are more pronounced at longer maturities. The expectation of future spot price dominates the risk premium in determining the term structure of Brent-WTI futures spread, especially at short maturities. The common risk premia in both markets are negative and similar, while their corresponding idiosyncratic risk premia have opposite signs. The common risk prices of WTI and Brent are generally related to the US crude commercial stock, inflation, economic uncertainty, and hedging pressure; however, idiosyncratic risk prices are more related to their corresponding local production, short rate, and the term structure factors. The variance decomposition indicates that the idiosyncratic factors account for a considerable part at longer forecast horizons in both markets.

A Theory of Equivalent Expectation Measures for Contingent Claim Returns

ABSTRACTThis paper introduces a dynamic change of measure approach for computing analytical solutions of expected future prices (and therefore, expected returns) of contingent claims over a finite horizon. The new approach constructs hybrid probability measures called equivalent expectation measures (EEMs) that provide the physical expectation of the claim's future price before the horizon date, and serve as pricing measures on or after the horizon date. The EEM theory can be used for empirical investigations of both the cross‐section and the term structure of returns of contingent claims, such as Treasury bonds, corporate bonds, and financial derivatives.

Investor Limited Attention, Opinion Divergence, and Post-earnings-announcement Drift: Evidence from China

ABSTRACT The study provides new evidence for the limited attention theory in explaining post-earnings-announcement drift (PEAD) by using the data of stocks listed in Shanghai and Shenzhen A-shares from 2000 to 2020. We introduce two types of inattentive investors: one ignores the market or industry information, while the other ignores the dividend information in a theoretical model and show that the effect of investors’ opinion divergence induced by inattentive investors drives the post-earnings-announcement drift (PEAD). The empirical test supports the testable hypothesis based on the model. When investors’ expectations of future stock prices are more inconsistent, the PEAD effect is more significant after the earnings announcement. Furthermore, the findings remain robust after a series of robustness tests, including the transformation of the variable definitions and the replacement of the study interval. And this positive relationship between opinion divergence and PEAD is more significant in the groups with low information transparency and poor corporate governance. The study provides new and direct evidence of investors’ concerns about the impact of market efficiency and regulators’ recommendations to promote the long-term development of China’s financial markets.

Keynes’s user cost and its implication for the real rate of interest

AbstractKeynes’s user cost in the General Theory is a two-dimensional concept. While its role as a national income accounting device to avoid double counting has arguably been subsumed under the current national income accounting practices, its significance in the context of the theory of value, specifically how user cost links the current prices of goods and services with their expected future prices, may not have been fully appreciated. This paper elaborates and develops the measurement of user cost along the lines indicated by Keynes and shows that user cost is an expectation-dependent component of prime cost that constitutes the conduit for future price expectations to feed into the current prices. It is argued that user cost plays the role of anchoring the current prices of goods and services to their expected future prices and that this has an implication that raises a serious question about the theoretical usefulness of the real rate of interest as an ex ante concept.

Cryptocurrencies and Cagan’s model of hyperinflation

The drivers of the prices of Bitcoin and Ethereum are studied within a framework based on Cagan’s model of hyperinflation. In the model, the prices of the cryptocurrencies are driven by stochastic adoption and velocity shocks as well as endogenous expectations of future prices. The model is estimated with data for prices, transaction volumes, and money supplies. A majority of price fluctuations in both currencies can be attributed to shocks in adoption, velocity shocks are much less important. The money demand sensitivity to expected price changes is estimated to be larger for Bitcoin than for Ethereum, and both have higher sensitivity than fiat currencies during episodes of hyperinflation.

Between Walras and Marshall: Menger's Third Way

Neoclassical economics is bifurcated between Marshall’s partial-equilibrium and Walras’s general-equilibrium analyses. Given the failure of neoclassical theory to explain the Great Depression, Keynes proposed an explanation of involuntary unemployment. Keynes’s contribution was later subsumed under the neoclassical synthesis of the Keynesian and Walrasian theories. Lacking microfoundations consistent with Walrasian theory, the neoclassical synthesis collapsed. But Walrasian GE theory provides no plausible account of how GE is achieved. Whatever plausibility is attributed to the assumption that price flexibility leads to equilibrium derives from Marshallian PE analysis, with prices equilibrating supply and demand. But Marshallian PE analysis presumes that all markets, but the small one being analyzed, are at equilibrium, so that price adjustments in the analyzed market neither affect nor are affected by other markets. The demand and cost (curves) of PE analysis are drawn on the assumption that all other prices reflect Walrasian GE values. While based on Walrasian assumptions, modern macroeconomics relies on the Marshallian intuition that agents know or anticipate the prices consistent with GE. Menger’s third way offers an alternative to this conceptual impasse by recognizing that nearly all economic activity is subjective and guided by expectations of the future. Current prices are set based on expectations of future prices, so equilibrium is possible only if agents share the same expectations of future prices. If current prices are set based on differing expectations, arbitrage opportunities are created, causing prices and expectations to change, leading to further arbitrage, expectational change, and so on, but not necessarily to equilibrium.

Research on Real Estate Wealth Effect under the Background of Double Cycle Based on VAR Model

In order to cope with the complex and severe development situation at home and abroad, in May 2020, the Party Central Committee proposed to accelerate the formation of a new development pattern with the domestic cycle as the main body and the mutual promotion of the domestic and international double cycles. Among them, the consumption of Chinese residents is a “double cycle” key part of strategy. From the perspective of consumption structure and property structure, real estate is an important part of household property and an important consumer object in China and it has a decisive influence on the effect of internal circulation. By constructing a real estate wealth effect model, this paper adopted the impulse response function method based on the VAR model, studies the changes in real estate prices, residents’ incomes, and residents’ consumption. The results show that the three interact with each other. In the long run, real estate has a positive wealth effect, but in the short term, there is a negative wealth effect, and consumers’ expectations of future housing prices will affect current consumption changes. In order to promote the domestic cycle, the author proposes to develop and improve the primary and secondary housing markets to ensure the liquidity of real estate, thereby stimulating consumption; guide residents to form healthy real estate price expectations, prevent large fluctuations in housing prices, and strictly stabilize consumption; the policy positioning of “no speculation” reduces the crowding-out effect of investment and speculative house purchases on residents’ daily consumption, thereby increasing consumption.

Institutional investor sentiment and aggregate stock returns

AbstractThis paper examines the equity market return predictability of institutional investor sentiment, in comparison to individual investor sentiment. Our findings suggest that institutional traders are informed and that their sentiment helps to tilt stock prices towards the intrinsic value. This is because the sentiment of institutions encompasses news regarding expectations on future cash flows of underlying firms that impounds itself into future price expectations. In this study, we add to the large number of studies that investigate the role and implications of investor sentiment, which has long been viewed as a pure behavioural phenomenon, on market efficiency and price discovery.

Extrapolation and House Price Overreaction: Evidence from Local Jurisdiction Mergers

This paper uses two similar local jurisdiction merger policies at different phases of a housing cycle to examine whether home purchasers form their expectations of future house prices based on lagged price changes. Using a detailed housing transaction data set, we find that, during the boom period, the relative home prices in the merged area increased significantly for a few months after a positive fundamental shock and then reverted. However, during the bust period, we find no overreaction of the relative house prices in the local merged districts after a similar shock. Moreover, we find that short-term speculators may be the main contributor to the housing price overreaction. Overall, our results confirm the role of over-extrapolation in house price dynamics.

Making sense of increased synchronization in global house prices

Purpose The purpose of this paper is to provide perspective on whether and why global metro house prices have become more synchronized, and perspective on the limited implications of this for investing in international real estate. Design/methodology/approach This paper reviews main findings from the literature on house price determination, reviews the emerging literature on global synchronization, and provides graphs to illustrate main points and trends. Findings House prices have become somewhat more synchronized likely reflecting greater correlation in long-term interest rates and macroeconomic cycles related to trends in globalization and international portfolio diversification. Nevertheless, this trend has not been continuous, reflecting that house prices depend on other fundamentals, which are not uniform across areas. Theory and evidence indicate that the more common are fundamentals, the more synchronized are house price cycles and the more substitution effects may matter. Also, real estate markets that are open to immigration and foreign investment have become more sensitive to shifts in the international demand for property by migrants or investors. Research limitations/implications Changes in international house price synchronization stem from variation in two categories of key drivers of house prices. The first are traditional supply and demand fundamentals. The second include international capital flows and immigration. Both sets of factors are sensitive to the economic environment and public policy. Increased synchronization of business cycles, the Euro currency union, and more common monetary policy strategies and tactics have fostered greater correlation of real interest rates across countries, which tend to increase house price synchronization. These effects can be amplified by the tendency for property owners to use extrapolative expectations of future house prices. Practical implications Shifts in prospective returns and the synchronization of international property returns not only on arbitrage of general property price differentials but also on underlying factors driving those differentials. Investors need to be mindful of the risks that metro prices sometimes reflect bubble-builder dynamics that can give rise to over-shooting of house prices. Observing simple correlations and changes in those correlations does not do away with the need for careful analysis of property investment, and if anything, warrant analysis of both how and why one may observe changes in the extent to which international house prices is synchronized. Social implications Despite the rise of globalization and of new technologies, the author has seen substantial divergences in house prices emerge across gateway cities and metros in less vibrant areas within countries. These reflect not only the impact of stronger income and population in more tech, educated and global oriented cities but also changes in the demand for amenities toward more culturally appealing cities, often – but not exclusively in – warmer or coastal areas where the supply elasticity of housing is often limited. Further complicating investment decisions are potential shifts in housing or immigration policy that can notably affect the demand for housing. Originality/value The paper provides practical perspective on why different groups of international cities have seen their house prices become more sychronized. Nevertheless, increased synchronization has occurred within an elite set of major cities, but in an environment house prices have diverged across gateway cities and metros in less vibrant areas within countries. The paper helps investors make sense of some recent patterns and recent prospects for investing in international real estate.

Structural Interdependence of Price and Demand in a Model of the Foreign Exchange Market with Heterogeneous Speculators: Evidence from High-frequency Data

We assume that the variations of the exchange rate depend on the current net demand of the base currency as a consequence of market making, and that the current net demand of the base currency depends on current and past variations of the exchange rate as a consequence of how future price expectations are formed by bounded rational agents. We achieve identification supposing that the structural shocks of price variations and demand follow a GARCH process. Using high-frequency transaction data of the EUR/USD market in 2016, we show that the simultaneous effects of price on demand and vice-versa are both significant and positive. Our estimates suggest that one important source of heterogeneity in demand might be missing from our model, since the structural errors are negatively correlated.

Hayek, Hicks, Radner and four equilibrium concepts: Perfect foresight, sequential, temporary, and rational expectations

Hayek was among the first to realize that for intertemporal equilibrium to obtain all agents must have correct expectations of future prices. Before comparing four categories of intertemporal, the paper explains Hayek’s distinction between correct expectations and perfect foresight. The four equilibrium concepts considered are: (1) Perfect foresight equilibrium of which the Arrow-Debreu-McKenzie (ADM) model of equilibrium with complete markets is an alternative version, (2) Radner’s sequential equilibrium with incomplete markets, (3) Hicks’s temporary equilibrium, as extended by Bliss; (4) the Muth rational-expectations equilibrium as extended by Lucas into macroeconomics. While Hayek’s understanding closely resembles Radner’s sequential equilibrium, described by Radner as an equilibrium of plans, prices, and price expectations, Hicks’s temporary equilibrium seems to have been the natural extension of Hayek’s approach. The now dominant Lucas rational-expectations equilibrium misconceives intertemporal equilibrium, suppressing Hayek’s insights thereby retreating to a sterile perfect-foresight equilibrium.

On Some Possible Explanations for the Continuing Denial of the Existence of Keynes’s IS-LM Model in Section 4 of Chapter 21 of the General Theory: Propaganda (from Joan Robinson), Ignorance (of the Keynes-Harrod Correspondence in Volume 13 Of the CWJMK in Late 1935), Anchoring (on Keynes’s Mention of Robinson’s Name in the Preface to the General Theory), Groupthink, and Cognitive

On Some Possible Explanations for the Continuing Denial of the Existence of Keynes’s IS-LM Model in Section 4 of Chapter 21 of the General Theory: Propaganda (from Joan Robinson), Ignorance (of the Keynes-Harrod Correspondence in Volume 13 Of the CWJMK in Late 1935), Anchoring (on Keynes’s Mention of Robinson’s Name in the Preface to the General Theory), Groupthink, and Cognitive

Institutional Investor Sentiment and Aggregate Stock Returns

This paper examines the equity market return predictability of institutional investor sentiment, in comparison to individual investor sentiment. Our findings suggest that institutional traders are informed and that their sentiment helps to tilt stock prices towards the intrinsic value. This is because the sentiment of institutions encompasses news regarding expectations on future cash flows of underlying firms that impounds itself into future price expectations. In this study, we add to the large number of studies that investigate the role and implications of investor sentiment, which has long been viewed as a pure behavioural phenomenon, on market efficiency and price discovery.

A Theory of Equivalent Expectation Measures for Expected Prices of Contingent Claims

This paper introduces a dynamic change of measure approach for computing the analytical solutions of expected future prices (and therefore, expected returns) of contingent claims over a finite horizon. The new approach constructs hybrid probability measures called the "equivalent expectation measures"(EEMs), which provide the physical expectation of the claim's future price until before the horizon date, and serve as pricing measures on or after the horizon date. The EEM theory can be used for empirical investigations of both the cross-section and the term structure of returns of contingent claims, such as Treasury bonds, corporate bonds, and financial derivatives.

A hybrid combinatorial approach to a two-stage stochastic portfolio optimization model with uncertain asset prices

Portfolio optimization is one of the most important problems in the finance field. The traditional Markowitz mean-variance model is often unrealistic since it relies on the perfect market information. In this work, we propose a two-stage stochastic portfolio optimization model with a comprehensive set of real-world trading constraints to address this issue. Our model incorporates the market uncertainty in terms of future asset price scenarios based on asset return distributions stemming from the real market data. Compared with existing models, our model is more reliable since it encompasses real-world trading constraints and it adopts CVaR as the risk measure. Furthermore, our model is more practical because it could help investors to design their future investment strategies based on their future asset price expectations. In order to solve the proposed stochastic model, we develop a hybrid combinatorial approach, which integrates a hybrid algorithm and a linear programming (LP) solver for the problem with a large number of scenarios. The comparison of the computational results obtained with three different metaheuristic algorithms and with our hybrid approach shows the effectiveness of the latter. The superiority of our model is mainly embedded in solution quality. The results demonstrate that our model is capable of solving complex portfolio optimization problems with tremendous scenarios while maintaining high solution quality in a reasonable amount of time and it has outstanding practical investment implications, such as effective portfolio constructions.