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The disposition effect is a longstanding puzzle in financial economics. This paper demonstrates that it is not intrinsically at odds with rational behavior. In a rational expectations model with asymmetrically informed investors, trading strategies as predicted by the disposition effect can arise as an optimal response to dynamic changes in the information structure. The model generates several novel predictions: the disposition behavior of unsophisticated investors should weaken after events that reduce information asymmetries and should be concentrated in stocks with weak price momentum. The data, trading records of 30,000 clients at a German discount brokerage firm from 1995 to 2000, are consistent with these predictions.

We investigate equilibrium in the buyer's bid double auction (BBDA) in a model with correlated private values/costs. Using a combination of theorems and computed examples, we demonstrate that simple equilibria exist even in small markets. Moreover, we bound traders' strategic behavior as a function of market size and derive rates of convergence to zero of (i) inefficiency in the allocation caused by strategic behavior and (ii) the error in the market price as an estimate of the rational expectations price. These rates together with computed examples suggest that strategic behavior can be inconsequential even in small markets in its effect on allocational efficiency and information aggregation. The BBDA thus simultaneously accomplishes both the informational and allocational goals that markets ideally fulfill; it does this perfectly in large markets and approximately in small markets, with the error due mainly to the smallness itself and not the strategic behavior of traders.

The article reveals the development of the hypothesis of rational expectations according to the theory of rational expectations (TRO), where economic entities in their forecasts make optimal use of all available information, including the assessment of government policy, to form an opinion on future developments. It turns out that expectations in the economy are very important. Rational expectations are those that can be systematically erroneous. They do not necessarily have to be performed exactly, but this is only because economic processes are subject to random fluctuations that do not depend on the actions of the state, or because the actions of the state in economic policy are unpredictable for economic agents.

We consider a noisy rational expectations equilibrium in a multi-asset economy populated by informed and uninformed investors, and noise traders. We relax the usual assumption of normally distributed asset payoffs and allow for assets with very general payoff distributions, including non-redundant contingent claims, such as options and other derivatives. We provide necessary and sufficient conditions under which contingent claims provide information about the source of uncertainty in the economy and, hence, reduce the asymmetry of information. We show that introducing a volatility derivative makes incomplete-market economies effectively complete. We also apply our results to pricing risky debt and equity and demonstrate that firms cannot manipulate the information contained in debt and equity prices by changing the face value of debt. Our paper provides a new tractable framework for studying asset prices under asymmetric information. When the market is complete, we derive the equilibrium in closed form. When the market is incomplete, we derive it in terms of easily computable inverse functions.

This introductory paper offers a look into the intellectual and technical progress that led Robert E. Lucas to his seminal paper entitled Expectations and the neutrality of money. It is argued that...

Problem definition: The existing literature on probabilistic or opaque selling has largely focused on understanding why it is attractive to firms. In this paper, we intend to answer a follow-up question: How should opaque selling be managed in a firm’s operations over time? Academic/practical relevance: Answering this question is relevant yet complex, because in practice (i) the profitability of opaque selling depends on how customers respond to the firm’s product-offering strategies and (ii) the firm’s strategies have to be responsive to customers’ purchasing decisions to maximize its total profit. Methodology: We develop a simple game-theoretic framework to capture the dynamic nature of the problem in multiple periods when customers boundedly rationally expect the firm’s strategies through anecdotal reasoning. We characterize the firm’s optimal pricing and product-offering policy. Results: We find that offering the high-value product with a high probability followed by a lower probability is typically optimal over time. We finally analyze several model extensions, such as different numbers of customers, multiple anecdotes, infinitely many periods, and limited inventory, and show the robustness of our results. Managerial implications: We demonstrate the value of using a dynamic probabilistic selling policy and prove that our dynamic policy can double the firm’s profit compared with using the static policy proposed in the existing literature. In a dynamic programming model, we prove that a cycle policy oscillating between two product-offering probabilities is typically optimal in the steady state over infinitely many periods.

Numerous studies have indicated that retail fuel prices respond more quickly when crude oil prices rise than when they fall. We suggest that the fuel price making process is discretionary with nonlinear price adjustment costs. Then the theories do not assume linear cointegration relation between input and output prices. This paper analyzes the asymmetric reactions of retail gasoline and diesel prices to changes in input prices in the U.S.A. by use of empirical approach based on the linear exponential adjustment costs formulation. This allows us to measure average weekly price biases caused by asymmetries. The orthogonality conditions implied by the rational expectation hypothesis make the generalized method of moments a natural candidate to estimate the reaction function. In order to ensure the robustness of our results, other estimators are used for estimation in some cases. The econometric analysis indicates that the reaction functions of several retail fuel prices (diesel and gasoline, regional, state and city prices) are correlated and, therefore, it is appropriate to estimate them using the system estimators. The following results arise from our study: retail fuel prices react asymmetrically to changes in crude oil spot prices at an overall level, as well as at the level of regions and the given states and cities; retail fuel prices react asymmetrically to changes in American port spot fuel prices; this study does not confirm the asymmetric relationship between spot crude oil prices and port spot fuel prices.

We investigate the choice of endogenous timing by managerial firms in the presence of network externalities under Bertrand competition. Contrast to the results of sequentiality in equilibrium, we demonstrate that when managers are being delegated both the market and timing decision, there exists a unique simultaneous move in equilibrium regardless of network externalities. However, when the choice of timing remains in the owners’ hands, if the network externalities are weak, it involves one owner of firm producing as a leader and the other owner of firm as a follower while there exists a unique simultaneous move in equilibrium if the network externalities are strong. Thus, the strength of network externalities plays an important role in both firms’ choice of roles and consensus between owner and manager. Consequently, from the viewpoint of social welfare and consumer surplus, Pareto superiority can be obtained endogenously when the strength of network externalities is strong under either consumers’ fulfilled or rational expectation.

We model situations of choice under uncertainty where one is exogenously given information about the unknown states as a “suggested prior” (as in weather forecasts, betting odds provided by bookmakers, success likelihoods provided by medical doctors, estimates given by financial analysts, etc.). We wish to understand when a decision maker would adopt the suggested prior as her own subjective beliefs, yielding fully to the power of suggestion. We find that this happens under surprisingly weak conditions: If a preference relation, may it be complete or incomplete, (1) uses the information it is given consistently (in the sense of being state-neutral) and (2) believes that events that are suggested to occur with zero probability will indeed not occur, then it is not only probabilistically sophisticated, but also holds the suggested beliefs as actual beliefs. If the agent is a (subjective) expected utility maximizer, this happens even in the absence of condition (2).

We investigate the impact of the extent of investors' short-termism on the market equilibrium in a dynamic rational expectations model. We show that multiple equilibria always arise irrespective of the degree of traders' myopia, and that short-termism alone may not be the cause of equilibrium multiplicity, but it does significantly affect the market quality of all equilibria. The liquidity, price efficiency and expected trading volume under the high trading intensity equilibrium (HTIE) are higher than those under the low trading intensity equilibrium (LTIE) no matter how myopic the informed traders are. As the extent of investors' short-termism increases, the difference between the HTIE and LTIE becomes larger. Interestingly, an increase in the degree of investors' myopia in the market on the one hand mitigates the instability of the unstable equilibrium --- the HTIE (upon market perturbations a higher degree of investors' myopia slows down the deviation from the original equilibrium under an HTIE), but on the other hand also dampens the stability of the stable equilibrium --- the LTIE (upon market perturbations a higher degree of investors’ myopia slows down the converging process to the original equilibrium under an LTIE).

This paper discusses how macroeconomics can and already has begun to make use of controlled experimental methods to address the assumptions and predictions of macroeconomic models as well as to evaluate the impacts of macroeconomic policy interventions. Specific issues addressed include rational expectations and alternatives, intertemporal optimization with an application to household consumption and savings decisions and the efficacy of various monetary policies.

PurposeThis 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/approachUsing 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.FindingsResults 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/implicationsThe 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/valueThis study uses secondary data for measuring behavioural biases and decomposes the effect between rational expectation and behavioural biases.

Purpose This paper aims to examine the effect of corruption on foreign direct investment (FDI) inflow in Ghana. This provides answers to the call for further empirical examination of the contextual impact of corruption on FDI inflow. Design/methodology/approach The study uses a non-linear ADRL time series econometric model to estimate data from the World Bank and the international country risk guide (1984–2019). Findings The study confirms the sand in the wheel and the grabbing hand hypothesis of the impact of control of corruption (CoC) on FDI both in the short and long run. However, degradation on the CoC index has a significant and more than a proportionate constraint on FDI inflows, while an improvement in CoC has no significant impact on improving FDI inflows. An explanation for this outcome was proposed after comparing this finding to a similar prior study with a Nigerian data set (Zangina and Hassan, 2020). The proposed explanation relied mainly on the rational expectation hypothesis and drawing elements of the efficient market hypothesis. FDI inflows do not react to outcomes or trajectories reasonably expected because such rationally expected future outcomes will have been modelled into existing FDI movement decisions. Instead, FDI flows react to “surprises” and often respond in a more than proportional manner. Practical implications Political leadership in Ghana should be conscious of the severe adverse effects of inaction or ineffective action in curbing corruption, leading to slippering in CoC rankings. In the case of Ghana, the dependence of FDI on CoC is even more pronounced as the other variables within the specified model show an insignificant impact on FDI. Additionally, admittedly aggregated cross-country data in econometric modelling is appealing and has some empirical basis, but these must not erode the relevance of country-specific studies as both are needed to support theorization. Originality/value The paper is among the first to test for the asymmetric relationship between corruption or its control thereof and FDI with a time series approach, and hence, the findings offer new insight.

My dissertation focuses on the interactions between the conduct of U.S. monetary policy and the expectations formed by households, firms and public institutions about the state of economy. The first two chapters develop new methods that I use in the subsequent chapters to study how expectations formed by economic agents about future economic conditions affect a given economy. The second chapter considers and extends the work in Farmer (2012a) to explain U.S. post-war data, and shows that it outperforms conventional economic theories due to its ability to account for persistent movements in the data. The last chapter explores how the effectiveness of monetary policy changed in the U.S. post-war period, and I provide evidence that since the early 1980's the monetary authority implemented policies that reduced economic uncertainty deriving from unforeseen changes in the expectations about future inflation.

This paper studies the inventory and price strategies of an omnichannel firm adopting the “Buy-Online-Return-to-Store” (BORS) policy. Taking the omnichannel participants’ rational expectation behavior and random demand into consideration, the optimal operation strategy is derived and the effectiveness of the BORS policy is explored. The results show that inventory and price display a positive relationship. The optimal inventory and price decrease with the return cost, consumers’ travel cost, and the proportion of low-value consumers, while they increase with consumers’ beliefs regarding the inventory availability rate. Online sales outperform store sales when there are more low-value consumers. Adopting a BORS policy may reduce price and inventory but increase profit when consumers’ store return cost is high or the firm’s store return cost is low. In addition, when the long-term additional favorable effect of the store return is large, the firm can derive more profit through BORS policy.

The benchmark rational expectations (RE) assumption both assumes an unrealistic degree of rationality for economic agents and fails to address how agents would come to coordinate on an equilibrium. This essay reviews how theories of learning, and more specifically adaptive learning, address these issues and can lead to policy conclusions distinct from those obtained under RE. Applications discussed include monetary policy in New Keynesian models, the neo-Fisherian policy view, inflation targets, hyperinflation models, and macroeconomic policy to avoid stagnation at the zero lower bound. Postprint

In the 1920s and 1930s, several Swedish economists whom Bertil Ohlin (1937) grouped under the label “Stockholm School” explored dynamic methods for macroeconomic analysis. They developed the concepts of sequence analysis and the twin notions of ex ante and ex post, which served to investigate the role of expectations in the coordination of incongruent plans in market systems. The starting point was Gunnar Myrdal’s dissertation on Price Formation and Change (1927, still untranslated), an attempt to show how the inclusion of expectations under imperfect foresight helps to transform static frameworks of general equilibrium analysis into dynamic theory. This led to an early discussion about “rational expectations,” in which that notion was actually used by Erik Lundberg and developed as an endogenous outcome of Wicksell-style cumulative processes by Erik Lindahl. This paper presents and discusses these and further contributions to expectations theory (partly still untranslated) by Myrdal, Lindahl, Lundberg, Ohlin, Dag Hammarskjold, Alf Johansson, and Ingvar Svennilson.

Rasyonel beklentiler hipotezine göre, ekonomik birimler mevcut tüm bilgiyi etkin şekilde kullanarak gelecekle ilgili doğru tahminlerde bulunurlar. Hipoteze göre ekonomik birimler hatalı tahminlerde bulunsalar dahi, mevcut bilgiyi kullanarak yapılan hatayı düzeltmeye yönelik beklentilerini şekillendirirler ve bu şekilde sistematik hata yapmazlar.Bu çalışmada Türkiye için rasyonel beklentiler hipotezinin geçerliliği enflasyon beklentileri özelinde test edilmiştir. Bu kapsamda çalışmada fiyatla ilgili beklentilerin yansızlığı ve etkinliği incelenerek beklentilerin rasyonel olup olmadığı incelenmektedir. Çalışmanın bulgularına göre, enflasyon beklentileri için etkinlik hipotezi kabul edilirken, beklentilerin yansızlığı hipotezi reddedilmektedir. Bu durum, mevcut bilgilerin kullanılıyor olmasına rağmen ekonomik birimlerin doğru tahminler yapamadığını ima etmektedir. Bu nedenle Türkiye için enflasyon beklentilerine ilişkin rasyonel beklentiler hipotezi reddedilmektedir. Ancak sonuçlar, beklentilerin yanlı olmasına rağmen, profesyonel tahmincilerin enflasyonu tahmin ederken birçok değişkeni dikkate aldığını da göstermektedir. Bu ise beklentilerin dikkate alınması durumunda, ekonomi politikalarının uygulanmasında politikaların kısmen etkili olabileceği anlamına gelmektedir., The rational expectations hypothesis suggests that economic agents make accurate forecasts about the future using all available information effectively. According to the hypothesis, even if the economic agents make incorrect estimates, they shape the expectations for correcting the error made using the available information and do not make systematic errors.In this study, the validity of the rational expectations hypothesis for Turkey, using expectations of the inflation rates, is tested. In this context, it is examined whether the expectations are rational or not by examining the unbiasedness and the efficiency of the expectations about the price. According to results, while the efficiency hypothesis is accepted for the expectations of inflation, the unbiasedness for expectations is rejected in the study. This means that although the current information is being used, economic agents can not make the accurate forecasts. Thus, the rational expectations hypothesis for inlation expectations for Turkey is rejected. However, results also show that although the expectations are biased, professional forecasters take into account many variables while forecasting the inflation. This implies that policies can be partially effective if expectations are taken into account in the implementation of economic policies.

This paper proposes a new theory of exchange rate determination. Under arbitrary beliefs, the exchange rate is determined by an equilibrium restriction which we call the generalized no-arbitrage condition. The pricing function predicts endogenous departures from the conventional rational expectations uncovered interest parity condition. In an empirical open-economy model with learning, using Canadian and United States data, we evaluate whether learning can account for exchange rate dynamics and reduce reliance on exogenous risk-premium shocks to explain departures from uncovered interest parity. Reminiscent of Justiniano and Preston (2010a) , we find learning dynamics help explain the persistence and volatility of exchanges rates but generate counter-factual predictions on international macroeconomic comovement.

In Keynes’ consumption theory absolute income is the major determinant of consumption, and the marginal propensity to consume determines the magnitudes of fiscal multipliers. Keynes employed a largely psychological analysis of consumption, rejecting the model of utility maximizing consumer. J. Duesenberry extended and improved Keynes’ approach by also emphasizing the role of psychological and social factors on consumption decisions (the relative income hypothesis). Similar conclusions regarding the role of income on consumption, and therefore support for Keynesian policies, are reached by Duesenberry’s analysis. The life-cycle hypothesis by Modigliani and Brumberg (1954), and the permanent income hypothesis by Friedman (1957), emerged as the two main alternatives to Keynes’ and Duesenberry’s approaches. Modern orthodox consumption theories are extensions of these two theories in a rational expectations framework. By employing the concept of forward looking, optimizing agents, current or relative income plays a minimal role in the life-cycle and permanent income hypotheses, and an even lesser role in contemporary orthodox consumption theories. Consequently, fiscal policy has a negligible effect on output and employment. The paper argues that Keynes and Duesenberry’s approaches were marginalized not because of their empirical or theoretical shortcomings, but because of emphasizing the psychological and social influences on consumption patterns, and because of not employing the intertemporal utility maximizing framework. The clear implication of the discussion is that the marginalization of absolute and relative income hypotheses was due to the dominance of a specific methodological framework that did not favour such approaches.

After cited several types of violence in part I, they do not have the same significance, neither the same meaning nor the same geopolitical scale. Maybe, specificity of political violence consists of its occurrence when relations are no longer conceivable or negotiable not even institutionalized or instituted, in other words, when symbolization fails and public spaces where violence could be debated don't exist or are fragmentary or unbalanced.