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Expectations Formation with Fat-tailed Processes: Evidence from Sales Forecasts

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Listed:
  • Eugene Larsen-Hallock
  • Adam Rej
  • David Thesmar

Abstract

We empirically analyze a large sample of firm sales growth expectations. We find that the relationship between forecast errors and lagged revision is non-linear. Forecasters underreact to typical (positive or negative) news about future sales, but overreact to very significant news. To account for this non-linearity, we propose a simple framework, where (1) sales growth dynamics have a fat-tailed high frequency component and (2) forecasters use a simple linear rule. This framework qualitatively fits several additional features of data on sales growth dynamics, forecast errors, and stock returns.

Suggested Citation

  • Eugene Larsen-Hallock & Adam Rej & David Thesmar, 2022. "Expectations Formation with Fat-tailed Processes: Evidence from Sales Forecasts," Papers 2210.10169, arXiv.org.
    • Handle: RePEc:arx:papers:2210.10169
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    References listed on IDEAS

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