The Qualitative Expectations Hypothesis: Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment

Research output: Working paperResearch

We introduce the Qualitative Expectations Hypothesis (QEH) as a new approach
to modeling macroeconomic and financial outcomes. Building on John Muth's seminal insight underpinning the Rational Expectations Hypothesis (REH), QEH represents the market's forecasts to be consistent with the predictions of an economistís model. However, by assuming that outcomes lie within stochastic intervals, QEH, unlike REH, recognizes the ambiguity faced by an economist and market participants alike. Moreover, QEH leaves the model open to ambiguity by not specifying a mechanism determining specific values that outcomes take within these intervals. In order to examine a QEH model's empirical relevance, we formulate and estimate its statistical analog based on simulated data. We show that the proposed statistical model adequately represents an illustrative sample from the QEH model. We also illustrate how estimates of the statistical model's parameters can be used to assess the QEH model's qualitative implications.
Original languageEnglish
Number of pages38
Publication statusPublished - 2017
SeriesUniversity of Copenhagen. Institute of Economics. Discussion Papers (Online)
SeriesInstitute for New Economic Thinking Working Paper Series

    Research areas

  • Faculty of Social Sciences - Asset-Price Movements, Model Ambiguity, Models with Time-Varying Parameters, REH, Behavioral Finance, GAS Models, rational expectations

ID: 182324679