Over-/Underreaction and Judgment Noise in Expectation Formation Job Market Paper Link
The correlation coefficients between forecast errors and forecast revisions are positive at the consensus level, but negative at the individual level. Past literature has interpreted this discrepancy as evidence for underreaction to news at the aggregate level and overreaction at the individual level. In this paper, I challenge this view by arguing that noise in predictive judgment can account for the difference. Using a stylized model, I examine how introducing judgment noise at the individual level changes the interpretation of the regression coefficients. First, a negative coefficient at the individual level no longer necessarily means overreaction. Second, the coefficient at the consensus level underestimates the degree of underreaction. Using forecast survey data, I provide evidence that judgment noise is large enough to reconcile the difference between the two coefficients. The structural parameter measuring over-/underreaction mainly points to underreaction, regardless of whether the model matches correlation coefficients at the individual or aggregate level.
How does Bounded Rationality Affect Corporate Bond Liquidity? Work in Progress
I analyze a macroeconomic model featuring both primary and secondary market of corporate bond, where investors choose to enter the secondary market endogenously. The interactions between investors’ entry decisions and their subjective belief about future corporate bond liquidity generate large amplifications, which helps to explain large market liquidity fluctuations in the corporate bond market.