Lux, Thomas, 1962- (2007) Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

This paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions. We study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem. The aggregate dynamics of the individuals’ decisions can be analyzed via the stochastic process governing the ensemble average of choices. Numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics. This approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization. Our application to a well-known business climate index provides strong indication of social interaction as an important element in respondents’ assessment of the business climate.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Rational expectations (Economic theory), Business cycles, Business forecasting, Social interaction, Opinion (Philosophy)
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	15 October 2007
Number:	No.07-
Number of Pages:	45
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Sixth Framework Programme (European Commission) (FP6)
Grant number:	516446 (SFP)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1732

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