Skip to content

IAI Actuarial Core Principles · Economic Modelling · Rational expectations theory and the efficient markets hypothesis

Under rational expectations, which statement about forecast errors in an actuary's economic scenario generator is correct?

Under rational expectations, forecast errors average zero and are uncorrelated with information available when forecasts were made. Errors still occur because of random shocks, but they cannot be predicted from known information without implying that information was ignored.

  1. AForecast errors have zero mean and are uncorrelated with information available when the forecast was madeCorrect
  2. BForecast errors are always positive because agents are optimistic
  3. CForecast errors are perfectly predictable from past errors
  4. DForecast errors are zero in every period
  5. Forecast errors depend only on the most recent past price

Explanation

Rational expectations means forecasts use all available information efficiently, so errors are unbiased and unrelated to that information. Errors are not zero in every period, since random shocks occur. Predictable errors would imply information is being ignored.

Did you get it right without looking?

One question tells you little. A timed set on Rational expectations theory and the efficient markets hypothesis shows your real accuracy, how long you take and where you lose marks.

Practise Rational expectations theory and the efficient markets hypothesisFree diagnostic mock

More Rational expectations theory and the efficient markets hypothesis questions