Overreaction and forecast horizon: longer-term expectations overreact more, shorter-term expectations drive fluctuations

Working paper

We use survey data on macroeconomic expectations, across 89 countries and going back to 1989, to establish four facts about how forecast biases depend on the time horizon of the forecast. The data cover average expectations and horizons from 0 to 10 years. (1) Expectations underreact at a horizon of one year or less. (2) Expectations overreact at horizons of two years or more. (3) Expectations are “too extreme” at all horizons. (4) Overreaction and over-extremity increase with forecast horizon. These four patterns hold across advanced and emerging economies, and across multiple macroeconomic variables. They are inconsistent with several popular models of overreaction, where the degree of overreaction is independent of forecast horizon. Finally, although long-term expectations exhibit stronger overreaction, it is short-term expectations that are most strongly associated with fluctuations in GDP, investment, and the stock market.

Authors: Halperin, B; Mazlish, JZ

• Publication status: Published
• Peer review status: Reviewed (other)
• Publisher: Department of Economics, University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford, UK
• Publication date: 2025-03-31
• ISSN: 1471-0498
• Paper number: 1076
• Language: English