The real effects of overconfidence and fundamental uncertainty shocks
Ambrocio, Gene (22.12.2017)
Numero
37/2017Julkaisija
Bank of Finland
2017
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201712221735Tiivistelmä
This study provides estimates of the real effects of macro-uncertainty de-
composed into fundamental and overconfidence bias components. Crucially,
overconfidence biases lower ex-ante measures of uncertainty, while fundamen-
tal uncertainty raises both ex-ante and ex-post measures. This distinction is
useful since the estimates on the real effects of the overconfidence component
of uncertainty mitigate endogeneity concerns. I first document evidence for
overconfidence biases from survey density forecasts in the US survey of pro-
fessional forecasters. Then, using a sign and zero restrictions identification
scheme in a vector autoregression (VAR), I find that increases in fundamental
uncertainty and declines in overconfidence tend to lower real activity.
composed into fundamental and overconfidence bias components. Crucially,
overconfidence biases lower ex-ante measures of uncertainty, while fundamen-
tal uncertainty raises both ex-ante and ex-post measures. This distinction is
useful since the estimates on the real effects of the overconfidence component
of uncertainty mitigate endogeneity concerns. I first document evidence for
overconfidence biases from survey density forecasts in the US survey of pro-
fessional forecasters. Then, using a sign and zero restrictions identification
scheme in a vector autoregression (VAR), I find that increases in fundamental
uncertainty and declines in overconfidence tend to lower real activity.