What do Professional Forecasters' Stock Market Expectations Tell Us about Herding, Information Extraction and Beauty Contests?

Jesper Rangvid, Maik Schmeling, Andreas Schrimpf

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that the average of all forecasters' beliefs influences an individual's own forecast. This effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends more on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.
We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that the average of all forecasters' beliefs influences an individual's own forecast. This effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends more on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.
LanguageEnglish
JournalJournal of Empirical Finance
Volume20
Issue number1
Pages109-129
ISSN0927-5398
DOIs
StatePublished - Jan 2013

Keywords

  • Expectations Formation
  • Herding
  • Higher-order Expectations
  • Stock Market Forecasts
  • Forecaster Heterogeneity

Cite this

@article{ab9966b70b7a4b4797f1f465f32ebb3d,
title = "What do Professional Forecasters' Stock Market Expectations Tell Us about Herding, Information Extraction and Beauty Contests?",
abstract = "We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that the average of all forecasters' beliefs influences an individual's own forecast. This effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends more on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.",
keywords = "Expectations Formation, Herding, Higher-order Expectations, Stock Market Forecasts, Forecaster Heterogeneity",
author = "Jesper Rangvid and Maik Schmeling and Andreas Schrimpf",
year = "2013",
month = "1",
doi = "10.1016/j.jempfin.2012.11.004",
language = "English",
volume = "20",
pages = "109--129",
journal = "Journal of Empirical Finance",
issn = "0927-5398",
publisher = "Elsevier",
number = "1",

}

What do Professional Forecasters' Stock Market Expectations Tell Us about Herding, Information Extraction and Beauty Contests? / Rangvid, Jesper; Schmeling, Maik; Schrimpf, Andreas.

In: Journal of Empirical Finance, Vol. 20, No. 1, 01.2013, p. 109-129.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - What do Professional Forecasters' Stock Market Expectations Tell Us about Herding, Information Extraction and Beauty Contests?

AU - Rangvid,Jesper

AU - Schmeling,Maik

AU - Schrimpf,Andreas

PY - 2013/1

Y1 - 2013/1

N2 - We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that the average of all forecasters' beliefs influences an individual's own forecast. This effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends more on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.

AB - We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that the average of all forecasters' beliefs influences an individual's own forecast. This effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends more on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.

KW - Expectations Formation

KW - Herding

KW - Higher-order Expectations

KW - Stock Market Forecasts

KW - Forecaster Heterogeneity

U2 - 10.1016/j.jempfin.2012.11.004

DO - 10.1016/j.jempfin.2012.11.004

M3 - Journal article

VL - 20

SP - 109

EP - 129

JO - Journal of Empirical Finance

T2 - Journal of Empirical Finance

JF - Journal of Empirical Finance

SN - 0927-5398

IS - 1

ER -