An Empirical Analysis of Expected Stock Price Movements

THE LIVINGSTON SURVEY of economists forecasts of key economic variables has served as the data source for a number of studies investigating the forrnation and effects of expectations. Much of this work has utilized the price level predictions from the survey to proxy anticipated inflation.l This measure of expected inflation has also been analyzed by several researchers to see if it conforrns to the notion of rational expectations, with differing conclusions .2 This paper extends the analysis of the Livingston data by examining the forecasts of common stock prices made by the individual survey participants. Since predicted movements in stock prices may play an important role in portfolio decisions and, according to Tobin's q model, real investment decisions, it seems useful to explore the characteristics of these forecasts. The paper addresses two main issues. First, are the stock price predictions in accord with rational expectation forrnation? Second, how are the respondents' expectations of stock price movements related to their forecasts of inflation and real

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