To Stand as a Tripod : The Coalition between Financial Econometrics and the RE-NRE Duality

The 2008 financial crisis has led to the breakdown of the new synthesis consensus in the mainstream economic theories. Rational expectations (RE) and non-rational expectations (NRE) have respectively explained the policy irrelevance of and the behavior departure from standard economic theories. On the basis of existing literature of RE and NRE, the paper introduces the RE-NRE duality of investors' expectations to denote that every real world investors' expectation may be partly described in terms not only of RE, but also of NRE. By explaining the frameworks, innovations, and backgrounds of the author's three-essay doctoral dissertation, Essays in Financial Econometric Investigations of Farmland Valuations (2013), the paper illustrates the empirical and theoretical fulcrums of the RE-NRE duality: (i) empirically, the three driving forces of Modern Expectation Theories, i.e. Rational Expectations, Behavioral Finance (NRE), and Financial Econometrics, will stand as a tripod to jointly promote the understanding and forecasting of financial phenomena, especially by adopting nonparametric estimations to overcome the quantization obstacles of NRE, and (ii) theoretically, the coalition between Financial Econometrics and the RE-NRE duality will constitute unified Modern Expectation Theories to provide a feasible conclusion for the debate between the hypotheses of RE and NRE, helping fill the void created by the breakdown of the new synthesis consensus in the mainstream economic theories. More intriguingly, the paper elaborates upon the dissertation's failure to explicitly address how to prevent financial crises by encouraging RE and how to constrain the negative impacts of financial crises by demotivating NRE, attempting to locate the source of the 2008 financial crisis in the consequences of the financial market's time horizon dilemma, and to connect the numerous studies and observations concerning the 2008 financial crisis through the practical effects of the RE-NRE duality