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

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  • 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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  • Rangvid, Jesper & Schmeling, Maik & Schrimpf, Andreas, 2013. "What do professional forecasters' stock market expectations tell us about herding, information extraction and beauty contests?," Journal of Empirical Finance, Elsevier, vol. 20(C), pages 109-129.
    • Handle: RePEc:eee:empfin:v:20:y:2013:i:c:p:109-129
    DOI: 10.1016/j.jempfin.2012.11.004
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    More about this item

    Keywords

    Expectations formation; Herding; Higher-order expectations; Stock market forecasts; Forecaster heterogeneity;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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