- The Impact of Expectation Feedback Systems on the Reaction of Market Price to Large Unanticipated Shocks
- Volume | Issue number
- 21 | 78
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Expectation formation plays a central role in modern economic modeling. Bao et al (2012) study how the expectation feedback system influences the behavior of individual expectations and market price after the fundamental price experiences large unexpected shocks. We find that markets with negative expectation feedback quickly converge to the new fundamental price, while markets with positive expectation feedback do not converge, but show underreaction in the short run and overreaction in the long run. A heterogeneous agent model explains these differences in aggregate outcomes.
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