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Predictability in Financial Markets: What Do Survey Expectations Tell Us?

Author

Listed:
  • Philippe Bacchetta

    (Study Center Gerzensee University of Lausanne FAME & CEPR)

  • Elmar Mertens

    (Study Center Gerzensee University of Lausanne)

  • Eric van Wincoop

    (University of Virginia NBER)

Abstract
There is widespread evidence of excess return predictability in financial markets. A potential explanation is that investors make expectational errors that are predictable. To examine this issue, we use data on survey expectations of market participants in the stock market, the foreign exchange market, and the bond and money markets in various countries. We find systematic evidence of predictable expectational errors across markets, sample periods and countries. Moreover, the predictability of expectational errors coincides with the predictability of excess returns: when a variable predicts expectational errors in a given market, it typically predicts the excess return as well. We conclude that that predictable expectational errors play a key role in understanding excess return predictability.

Suggested Citation

  • Philippe Bacchetta & Elmar Mertens & Eric van Wincoop, 2006. "Predictability in Financial Markets: What Do Survey Expectations Tell Us?," Working Papers 102006, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:102006
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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