Simple Rational Expectations Model Research Articles

A Simple Rational Expectations Model of the Voltage Effect

A Simple Rational Expectations Model of the Voltage Effect

A Simple Rational Expectations Model of the Voltage Effect

A Simple Rational Expectations Model of the Voltage Effect

The formation of expectations: Competing theories and new evidence

Agents form expectations about the future in many markets, and these expectations drive investment and consumption behavior, inform entry and exit choices, and can even provide direct satisfaction or distress. How agents form expectations is therefore of central interest to economists. This paper reviews three competing theories and then provides empirical evidence about what elements make up an agent's expectation about an outcome that is person-specific, susceptible to influence by the agent's own actions, and fairly well predictable on the basis of historical precedent. We examine repeated cross-sections of hundreds of undergraduate students’ expectations at mid-semester of their own final course grades at two Australian universities. Data on actual and expected grades are exploited, as well as demographic and psychological information, course information, and data on students’ academic background, effort levels, happiness, and historical progress at university prior to expectation formation. Results indicate that a simple rational expectations model of expectation formation provides a poorer fit to the data than a utility model involving either direct utility benefits from expectations, or a psychological need to hold high expectations.

Instability of Financial Markets and Preference Heterogeneity

This paper presents a simple rational expectations model of intertemporal asset pricing relating instability of stock return characteristics to heterogeneity in investor preferences. Heterogeneity is likely to generate declining aggregate relative risk aversion. This leads to variability in expected asset returns, volatility, and autocorrelation. The stronger this variability is, the more heterogeneous preferences are, implying more instability of financial markets. Stock market crashes may be observed if relative risk aversion differs strongly across investors.

Return Predictability and Stock Market Crashes in a Simple Rational Expectations Model

This paper presents a simple rational expectations model of intertemporal asset pricing. Heterogeneous risk aversion of investors is likely to generate declining aggregate relative risk aversion which leads to predictability of asset returns and high and persistent volatility. Stock market crashes may be observed if relative risk aversion differs strongly across investors. Then aggregate relative risk aversion may sharply increase given a small impairment in fundamentals so that asset prices may strongly decline. Changes in aggregate relative risk aversion may also lead to resistance and support levels as used in technical analysis. For numerical illustration we propose an analytical asset price formula.

Rational Asset Pricing Implications from Realistic Trading Frictions

We study a simple rational expectations model whose asset pricing implications address some of the mispricings, informational inefficiencies and overreactions observed in real markets, without a need to resort to behavioural assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk (execution risk) and of asset-specific orders (the demand function for asset 'a' cannot be made contingent on the price of any asset other than 'a'). These induce allocational and informational inefficiencies akin to the ones observed in reality. Furthermore, the decision making entity becomes segmented into distinct trading desks.

Interest Rate Policy with Expectations of Devaluation

The problem of recurrent devaluations in the Nordic countries is dealt with using a simple rational expec tations model. Given imperfect international asset substitutability a nd sufficient foreign exchange reserves, a small open economy can use interest rate policies geared to competitiveness to put an end to re current devaluations. If this policy is known and credible, no intere st rate adjustments are called for, except shortly before and during the expected devaluation phase. In contrast, a completely unanticipat ed interest rate policy requires that the rate of interest be raised continuously as the expected devaluation date is approached. Copyright 1988 by The editors of the Scandinavian Journal of Economics.

The influence of lagged unanticipated money on real variables: A simple illustrative model

The paper extends a simple rational expectations model to allow for the possibility that relative demand shocks are serially correlated, and some suppliers face decision lags so that they must decide what quantity of output to produce some time before they actually produce it. The model implies that current and lagged monetary shocks can have real output effects, and that the coefficients linking output to current and past monetary shocks can exhibit a variety of patterns. I would like to thank C.L.F. Attfield, D. Demery and J. Haskell for their helpful comments, and two anonymous referees for their suggestions on an earlier draft. I am responsible for any errors that remain.

Distinguishing between rational expectations and ‘Keynesian’ models of the business cycle in the presence of a structural break in the money growth process

This paper uses an apparent structural break in the post-war U.K. money growth equation to test the validity of the restrictions implied by a simple rational expectations model of the business cycle. The test suggests that those restrictions cannot be rejected.

Some results on analytic optimal control solution of a simple rational expectations model

In this note, we correct a technical error in a well-known stabilization analysis in the context of a simple macroeconomic model, formulated as an optimal control problem. This error originated in a slip in an unpublished but widely circulated paper by D.A. Livesey, suggesting a procedure for obtaining a solution to a class of optimal control problems frequently encountered in a stabilization literature. We then propose an ad hoc solution method which makes clear the intuition of the solution to the particular model to which the Livesey method was applied, and of the larger class of models to which it belongs. Our solution is so formulated that the contrast between it and the Livesey result is made transparent.

A Lagrange Multiplier Test of the Restrictions for a Simple Rational Expectations Model

The Lagrange multiplier test of the restrictions for a simple but common class of rational expectations model is developed. For these kinds of models the value of this test will never exceed the likelihood ratio. The difference is usually small, because Monte Carlo evidence suggests that it performs similarly to the likelihood ratio and Wald tests in small samples. However, an economic example suggests that larger differences are possible.

A Test of Price Sluggishness in the Simple Rational Expectations Model: U.K. 1950-1980

Journal Article A Test of Price Sluggishness in the Simple Rational Expectations Model: U.K. 1950-1980 Get access G. Alogoskoufis, G. Alogoskoufis London School of Economics Search for other works by this author on: Oxford Academic Google Scholar C. A. Pissarides C. A. Pissarides London School of Economics Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 93, Issue 371, 1 September 1983, Pages 616–628, https://doi.org/10.2307/2232398 Published: 01 September 1983