TY  - JOUR
AU  - Hong,Harrison
AU  - Stein,Jeremy C.
TI  - Simple Forecasts and Paradigm Shifts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10013
PY  - 2003
Y2  - October 2003
UR  - http://www.nber.org/papers/w10013
L1  - http://www.nber.org/papers/w10013.pdf
N1  - Author contact info:
Harrison Hong
Department of Economics
Princeton University
26 Prospect Avenue
Princeton, NJ 08540
Tel: 609/258-0259
Fax: 609/258-0771
E-Mail: hhong@princeton.edu

Jeremy C. Stein
Federal Reserve Board of Governors
20th Street and Constitution Ave., N.W.
Washington, DC 20551
E-Mail: jeremy.c.stein@frb.gov
AB  - We study the implications of learning in an environment where the true model of the world is a multivariate one, but where agents update only over the class of simple univariate models. If a particular simple model does a poor job of forecasting over a period of time, it is eventually discarded in favor of an alternative   yet equally simple   model that would have done better over the same period. This theory makes several distinctive predictions, which, for concreteness, we develop in a stock-market setting. For example, starting with symmetric and homoskedastic fundamentals, the theory yields forecastable variation in the size of the value/glamour differential, in volatility, and in the skewness of returns. Some of these features mirror familiar accounts of stock-price bubbles.
ER  -