Analysing how price expectations are formed is essential since the dynamics of market prices are mainly driven by the agent's belief concerning the future values of prices and by the uncertainty characterising these values. This is a difficult task as prices are highly volatile in most markets and expectational behaviour is heterogeneous and unstable.
This volume discusses the concept of rationality of expectations from both a theoretical and an empirical point of view, and on individual and collective levels. Concerning the first aspect, the book focuses on how agents collect and process information and how market opinion is formed. Concerning the second aspect, the book presents studies based on individual price expectations and on the 'consensus' revealed by survey data. To appreciate the degree of generality of expectational behaviour, the contributors analyse price expectations in a variety of markets, periods and countries. Great attention is paid to financial markets which have represented the main field of analysis of expectations over the last ten years.
Four main lessons stem from the works presented in this book. First, if the REH in the muthian sense seems now invalidated, this result does not mean that there is not rationality in price expectations: on the one hand, expectations may be economically rational in the sense of the advantage-cost analysis, and, on the other hand, the exchange of information between agents through the market may involve some mimetic rationalities. Second, it appears important to take into account the individual nature of expectations both at the theoretical and empirical levels: generally, the heterogeneity is not neutral in reaching an economic equilibrium or in estimating expectational processes. Third, expectational behaviour change over time: both the processes and the parameters which intervene in these processes are time-varying, especially according to the volatility of the variables. Fourth, a combination of these three basic processes appears to be successful in explaining the dynamics of expectations, although the expectational process is rather extrapolative (destabilising) when the horizon is short and rather regressive and adaptive (stabilising) when the horizon is long.
Edited by François Gardes, Professor of Economics, University of Paris I-Panthéon-Sorbonne and Member, TEAM, Paris, France and Georges Prat, Director of Research, National Center of Scientific Research (CNRS) and Member, MODEM, University of Paris-X Nanterre, France
