Date: 6 Dec 2022 (Tue)
CUHK-Tsinghua University Brownbag Seminar:
Gaps in Forecasts: Evidence and Theory
6 Dec 2022, Tuesday
12:20 pm – 1:20 pm (Hong Kong Time, UTC+8)
Youdan Zhang, The Chinese University of Hong Kong
This paper documents the existence of pessimistic gaps between households’ point estimates and the mean of their subjective beliefs about the outlook of the economy. Compared to their subjective beliefs, households’ point estimates or their survey responses are more pessimistic. The pessimistic gap is increasing in the volatility of subjective beliefs and get worsened when the household is more pessimistic in his subjective beliefs. We revisit the canonical forecast error (FE) on forecast revision (FR) regressions in the literature using both point estimates and mean forecasts of subjective beliefs. The documented pessimistic gaps have little impact on the FE-on- FR regression at the individual level but change the empirical results at the consensus level. The empirical evidence about the gaps in forecasts favors the combination of dispersed information, overconfidence and risk sensitivity.