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What do professional forecasters' stock market expectations tell us about herding, information extraction and beauty contests?

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Author Info

  • Rangvid, Jesper
  • Schmeling, Maik
  • Schrimpf, Andreas

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 20 (2013)
Issue (Month): C ()
Pages: 109-129

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Handle: RePEc:eee:empfin:v:20:y:2013:i:c:p:109-129

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Expectations formation; Herding; Higher-order expectations; Stock market forecasts; Forecaster heterogeneity;

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Cited by:
  1. Schanne, Norbert, 2012. "The formation of experts' expectations on labour markets : do they run with the pack?," IAB Discussion Paper 201225, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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