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Behavioral Impulse Responses

Author

Listed:
  • Bryan T. Kelly

    (Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER))

  • Semyon Malamud

    (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Emil Siriwardane

    (Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER))

  • Hongyu Wu

    (Yale School of Management)

Abstract

We develop the concept of a Behavioral Impulse Response (BIR), which uses the dynamics of forecast errors to trace out how deviations from full-information rational expectations (FIRE) are corrected over time. BIRs based on professional forecasts of macroeconomics outcomes and corporate earnings imply that violations of FIRE occur much more frequently than suggested by existing tests. These deviations tend to correct gradually, often over several quarters, with sizable variation in correction speeds across different forecast targets and forecasters. Our theoretical analysis highlights why BIRs provide a simple yet powerful set of moments that can be used to discipline models of belief formation.

Suggested Citation

  • Bryan T. Kelly & Semyon Malamud & Emil Siriwardane & Hongyu Wu, 2025. "Behavioral Impulse Responses," Swiss Finance Institute Research Paper Series 25-04, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2504
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5089257
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    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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