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Financial Markets Forecasts Revisited: Are they Rational, Herding or Bold?

Author

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  • Ippei Fujiwara

    (Associate Professor, Australian National University, CAMA, EABCN, and Globalization and Monetary Policy Institute (FRB Dallas) (E-mail: ippei.fujiwara@anu.edu.au))

  • Hibiki Ichiue

    (Director, Monetary Affairs Department, Bank of Japan (E-mail: hibiki.ichiue@boj.or.jp))

  • Yoshiyuki Nakazono

    (Waseda University and Research Fellow of the Japan Society for the Promotion of Science (Email: ynakazono@fuji.waseda.jp))

  • Yosuke Shigemi

    (Director, Institute for Monetary and Economic Studies, (currently Information System Services Department), Bank of Japan (E-mail: yousuke.shigemi@boj.or.jp))

Abstract

We test whether professional forecasters forecast rationally or behaviorally using a unique database, QSS Database, which is the monthly panel of forecasts on Japanese stock prices and bond yields. The estimation results show that (i) professional forecasts are behavioral, namely, significantly influenced by past forecasts, (ii) there exists a stock-bond dissonance: while forecasting behavior in the stock market seems to be herding, that in the bond market seems to be bold in the sense that their current forecasts tend to be negatively related to past forecasts, and (iii) the dissonance is due, at least partially, to the individual forecasters f behavior that is influenced by their own past forecasts rather than others f. Even in the same country, forecasting behavior is quite different by market.

Suggested Citation

  • Ippei Fujiwara & Hibiki Ichiue & Yoshiyuki Nakazono & Yosuke Shigemi, 2012. "Financial Markets Forecasts Revisited: Are they Rational, Herding or Bold?," IMES Discussion Paper Series 12-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:12-e-06
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    References listed on IDEAS

    as
    1. Alan Beggs & Kathryn Graddy, 2009. "Anchoring Effects: Evidence from Art Auctions," American Economic Review, American Economic Association, vol. 99(3), pages 1027-1039, June.
    2. Andreas Park & Hamid Sabourian, 2011. "Herding and Contrarian Behavior in Financial Markets," Econometrica, Econometric Society, vol. 79(4), pages 973-1026, July.
    3. Hibiki Ichiue & Tomonori Yuyama, 2009. "Using Survey Data to Correct the Bias in Policy Expectations Extracted from Fed Funds Futures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1631-1647, December.
    4. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
    5. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, August.
    6. Tilman Ehrbeck & Robert Waldmann, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 21-40.
    7. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, August.
    8. Harrison Hong & Jeffrey D. Kubik & Amit Solomon, 2000. "Security Analysts' Career Concerns and Herding of Earnings Forecasts," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 121-144, Spring.
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    Cited by:

    1. Meub, Lukas & Proeger, Till, 2016. "Are groups 'less behavioral'? The case of anchoring," Center for European, Governance and Economic Development Research Discussion Papers 188 [rev.], University of Goettingen, Department of Economics.
    2. Colasante, Annarita & Alfarano, Simone & Camacho Cuena, Eva & Gallegati, Mauro, 2017. "Long-run expectations in a Learning-to-Forecast-Experiment: a simulation approach," MPRA Paper 77618, University Library of Munich, Germany.
    3. Meub, Lukas & Proeger, Till & Bizer, Kilian, 2013. "Anchoring: A valid explanation for biased forecasts when rational predictions are easily accessible and well incentivized?," Center for European, Governance and Economic Development Research Discussion Papers 166, University of Goettingen, Department of Economics.
    4. Annarita Colasante & Simone Alfarano & Eva Camacho-Cuena, 2018. "The term structure of cross-sectional dispersion of expectations in a Learning-to-Forecast Experiment," Working Papers 2018/02, Economics Department, Universitat Jaume I, Castellón (Spain).
    5. Francesca Pancotto & Filippo Maria Pericoli & Marco Pistagnesi, 2013. "Inefficiency in Survey Exchange Rates Forecasts," Center for Economic Research (RECent) 090, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    6. Meub, Lukas & Proeger, Till, 2014. "Are groups 'less behavioral'? The case of anchoring," Center for European, Governance and Economic Development Research Discussion Papers 188, University of Goettingen, Department of Economics.
    7. Meub, Lukas & Proeger, Till, 2014. "An experimental study on social anchoring," Center for European, Governance and Economic Development Research Discussion Papers 196, University of Goettingen, Department of Economics.

    More about this item

    Keywords

    Anchoring; Bold; Herding; Survey Forecasts;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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