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1 – 10 of over 18000An exciting opportunity that many advanced industrial democracies faced in the late 1990s was the movement from budgetary deficit to surplus. This came after years of persistent…
Abstract
An exciting opportunity that many advanced industrial democracies faced in the late 1990s was the movement from budgetary deficit to surplus. This came after years of persistent deficits. Traditional decisionmaking theories such as budgetary incrementalism failed to explain this longrun relationship, since it has been inherently a short-run theory. This paper uses rational expectations theory to demonstrate its relationship to budgetary decision-making reforms and the deficit (surplus) for Canada, the UK and the United States. The results demonstrated that there was an intertemporal budget constraint in operation in the three countries, and decision-makers at the macro level used rational expectations in the formulation of their annual budget. In the theory, budget actors strived to balance their budget, but did so over the longrun as opposed to the short-run incrementalist interpretation.
The different types of estimators of rational expectations modelsare surveyed. A key feature is that the model′s solution has to be takeninto account when it is estimated. The two…
Abstract
The different types of estimators of rational expectations models are surveyed. A key feature is that the model′s solution has to be taken into account when it is estimated. The two ways of doing this, the substitution and errors‐in‐variables methods, give rise to different estimators. In the former case, a generalised least‐squares or maximum‐likelihood type estimator generally gives consistent and efficient estimates. In the latter case, a generalised instrumental variable (GIV) type estimator is needed. Because the substitution method involves more complicated restrictions and because it resolves the solution indeterminacy in a more arbitary fashion, when there are forward‐looking expectations, the errors‐in‐variables solution with the GIV estimator is the recommended combination.
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Franz Fuerst and Anna‐Maija Grandy
Expectations of future market conditions are acknowledged to be crucial for the development decision and hence for shaping the built environment. The purpose of this paper is to…
Abstract
Purpose
Expectations of future market conditions are acknowledged to be crucial for the development decision and hence for shaping the built environment. The purpose of this paper is to study the central London office market from 1987 to 2009 and test for evidence of rational, adaptive and naive expectations.
Design/methodology/approach
Two parallel approaches are applied to test for either rational or adaptive/naive expectations: vector auto‐regressive (VAR) approach with Granger causality tests and recursive OLS regression with one‐step forecasts.
Findings
Applying VAR models and a recursive OLS regression with one‐step forecasts, the authors do not find evidence of adaptive and naïve expectations of developers. Although the magnitude of the errors and the length of time lags between market signal and construction starts vary over time and development cycles, the results confirm that developer decisions are explained, to a large extent, by contemporaneous and historic conditions in both the City and the West End, but this is more likely to stem from the lengthy design, financing and planning permission processes rather than adaptive or naive expectations.
Research limitations/implications
More generally, the results of this study suggest that real estate cycles are largely generated endogenously rather than being the result of large demand shocks and/or irrational behaviour.
Practical implications
Developers may be able to generate excess profits by exploiting market inefficiencies but this may be hindered in practice by the long periods necessary for planning and construction of the asset.
Originality/value
This paper focuses the scholarly debate of real estate cycles on the role of expectations. It is also one of very few spatially disaggregate studies of the subject matter.
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The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a…
Abstract
Purpose
The causes for the formation of a bubble in the collateral market when agents are provided with homogeneous expectations are explored. This bubbly dynamics will define a sufficient condition for deleveraging.
Design/methodology/approach
Theoretical approach with neutral deleveraging.
Findings
Findings of the study are defined sufficient conditions for a behavioral rational bubble's formation in a market of collateral and the subsequent deleveraging. The crowd-in effect of the representative bubble is caused by errors in extrapolating information and thus by representativeness, while the crowd-out effect of deleveraging is set off by reverting to a rational heuristic.
Research limitations/implications
The limit is that it is a homogeneous expectations approach, the implication is that cannot be rational speculation.
Practical implications
Even in a simple model of homogeneous expectations a bubble may arise with serious effect on the demand side: models that detect just rational mispricings cannot account for behavioral components that have financial and real effects.
Originality/value
The paper defines how deleveraging may occur even in case of homogeneous expectations. The latter should not be seen just as a limit but also as a signal of the importance of being aware of behavioral components.
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Incorrect inflationary expectations affect the unemployment rate,hence the question of how expectations are formed is crucial. Examinestwo hypotheses which have dominated the…
Abstract
Incorrect inflationary expectations affect the unemployment rate, hence the question of how expectations are formed is crucial. Examines two hypotheses which have dominated the discussion: the adaptive (AEH) and the rational expectations hypothesis (REH). During the 1980s it was assumed that REH was to be preferred to AEH, but various problems with REH have emerged. Focuses on two of these problems: whether participants in the labour market have the requisite information; and the presence of multiple RE equilibria. It may therefore be necessary for agents to co‐ordinate their expectations. Suggests that institutions of the labour market might hold the key to this question of co‐ordination.
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Kashif Rashid, Yasir Bin Tariq and Mamoon Ur Rehman
This study examines the role of behavioural factors, such as confidence, optimism, pessimism and rational expectation, in affecting investment decisions in the Pakistani stock…
Abstract
Purpose
This study examines the role of behavioural factors, such as confidence, optimism, pessimism and rational expectation, in affecting investment decisions in the Pakistani stock market.
Design/methodology/approach
Using daily trading data of Karachi Stock Exchange-100 index from January 2012 to December 2015, different regression models, including descriptive statistics and stationarity tests, are performed.
Findings
Results indicate that stock market trading has suffered from pessimistic behaviour of investors. In the first model, the authors find a positive sign of confidence and negative sign of optimism with the trading volume. The second model shows a positive role of confidence and rational expectations in affecting the trading volume in daily, Monday and Friday samples. The results of the third model show a negative sign of both optimism and rational expectation with the trading volume. Furthermore, the next model shows a negative sign of confidence combined with pessimism while testing their relationship with the trading volume. Finally, results of the final model suggest that optimism negatively affects the trading volume, and on the other hand, pessimism has a positive impact on the trading volume.
Research limitations/implications
The method and empirical testing of behavioural biases and their relationship with economic variable used in this study seem to be a promising way to better understand the role of psychology in deriving financial decisions for academics and policymakers.
Originality/value
This study uses secondary data for measuring behavioural biases and decomposes the effect between rational expectation and behavioural biases.
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Dimitrios Anastasiou and Stelios Giannoulakis
This study investigates which expectation formation mechanism governs Eurozone firms regarding their expectations on external finance availability.
Abstract
Purpose
This study investigates which expectation formation mechanism governs Eurozone firms regarding their expectations on external finance availability.
Design/methodology/approach
In this study, we link consecutive surveys from the Survey on the Access to Finance of Enterprises to bring new evidence on how non-financial corporations shape their expectations on external finance availability.
Findings
In line with the past literature, we demonstrate that the data reject the Rational Expectations hypothesis, and we find evidence in favor of the Adaptive Expectation mechanism.
Originality/value
This is the first study studying firms' expectations of external finance availability, implementing survey data of firms' expectations from the SAFE database on a country level. The formation of firm expectations is vital in directing policymakers in designing appropriate monetary policies, as both the employment and inflation targets of central banks around the world are highly dependent on the firm-level decision process.
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Feng Gao, Fengming Song and Jun Wang
The paper aims to test the rational‐expectations hypothesis using data from the Chinese stock market.
Abstract
Purpose
The paper aims to test the rational‐expectations hypothesis using data from the Chinese stock market.
Design/methodology/approach
The rational‐expectations hypothesis plays a critical role in economic and financial studies. However, it is unclear whether this hypothesis is consistent with real‐world decision making since existing empirical results are mixed. This paper tests the hypothesis directly using survey data from China's stock market by developing a technique to analyze discrete or limited independent‐variable models.
Findings
The paper shows that in China's stock market survey forecasts are overly optimistic, especially with positive information, and can be improved slightly using past information.
Originality/value
The paper develops a technique to analyze the discrete or limited independent‐variable model. Testing with Chinese stock market data provides some insights into the characteristics of emerging markets.
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– The purpose of this paper is to solve the optimal managerial compensation problem when shareholders are either naïvely optimistic or rational.
Abstract
Purpose
The purpose of this paper is to solve the optimal managerial compensation problem when shareholders are either naïvely optimistic or rational.
Design/methodology/approach
The paper uses applied game theory to derive the optimal CEO compensation package with over optimistic shareholders.
Findings
The results suggest that boards of directors should decrease option grants to CEOs when equity is likely to be irrationally overvalued at the date when the CEO's options vest.
Research limitations/implications
The implications of the model are consistent with the available empirical evidence. In addition, the model generates new testable predictions about managerial stock price manipulation, the number of options granted, and the magnitude of the options’ strike prices that have not yet been formally tested.
Originality/value
This is the only paper to derive closed-form solutions to optimal CEO compensation when shareholders are naïvely optimistic.
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Strategic decisions taken during financial instability periods are directly influenced by the competitive environment in which actors are evolving. In the highly financialized…
Abstract
Purpose
Strategic decisions taken during financial instability periods are directly influenced by the competitive environment in which actors are evolving. In the highly financialized context in which they proceed, firms are moving in a half light. The rational expectations hypothesis no longer stands relevant when the information made available to actors is incomplete. The aim of this paper is to discuss how in such a situation, firms and banks interact using uncertain profit expectations, and then feed financial crises.
Design/methodology/approach
The paper pinpoints the key role played by a competitive environment on firms' and banks' strategic governance, by discussing a cognitive or experience linked expectations model. It then focuses on the free play of behavior in these enhanced competitive spaces.
Findings
Once admitted the irrelevancy of the rational expectations hypothesis, an optimal way of characterizing expectations under uncertainty is proposed. This solution helps to illustrate how the free play of banks and firms in today's enhanced competitive spaces generate systematic escalations on the markets.
Originality/value
Financial governance would gain more from being steered towards a more explicit consideration of speculative behaviors: the cognitive or experience linked expectations model proposed in this paper is a first attempt to discuss this question.
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