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Dynamic Expectation Theory: Insights for Market Participants

Economics Department, ESB Business School, Alteburgstr. 150, 72762 Reutlingen, Germany
J. Risk Financial Manag. 2019, 12(2), 77; https://doi.org/10.3390/jrfm12020077
Received: 1 April 2019 / Revised: 22 April 2019 / Accepted: 25 April 2019 / Published: 1 May 2019
(This article belongs to the Section Financial Markets)
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Abstract

This paper develops a new methodology in order to study the role of dynamic expectations. Neither reference-point theories nor feedback models are sufficient to describe human expectations in a dynamic market environment. We use an interdisciplinary approach and demonstrate that expectations of non-learning agents are time-invariant and isotropic. On the contrary, learning enhances expectations. We uncover the “yardstick of expectations” in order to assess the impact of market developments on expectations. For the first time in the literature, we reveal new insights about the motion of dynamic expectations. Finally, the model is suitable for an AI approach and has major implications on the behaviour of market participants. View Full-Text
Keywords: expectation theory; information theory; AI; risk management; financial dynamics; neuroeconomics; econopyhsics expectation theory; information theory; AI; risk management; financial dynamics; neuroeconomics; econopyhsics
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Herzog, B. Dynamic Expectation Theory: Insights for Market Participants. J. Risk Financial Manag. 2019, 12, 77.

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