Scale Dependence of Overconfidence in Stock Market Volatility Forecasts
In this study, we analyze whether volatility forecasts (judgmental confidence intervals) are influenced by the specific elicitation mode (i.e. whether forecasters have to state future price levels or directly future returns as upper and lower bounds). We present questionnaire responses of about 250 students from two German universities. Participants were asked to state median forecasts as well as confidence intervals for seven stock market time series. Using a between subject design, one half of the subjects was asked to state future price levels, the other group was directly asked for returns. Consistent with prior research we find that subjects underestimate the volatility of stock returns, indicating overconfidence. As a new insight, we find that the strength of the overconfidence effect in stock market forecasts is highly significantly affected by the fact whether subjects provide price or return forecasts. Volatility estimates are lower (and the overconfidence bias is thus stronger) when subjects are asked for returns compared to price forecasts.
|Date of creation:||03 Dec 2008|
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|Note:||Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.|
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- Lawrence, Michael & Goodwin, Paul & O'Connor, Marcus & Onkal, Dilek, 2006. "Judgmental forecasting: A review of progress over the last 25 years," International Journal of Forecasting, Elsevier, vol. 22(3), pages 493-518.
- Du, Ning & Budescu, David V., 2007. "Does past volatility affect investors' price forecasts and confidence judgements?," International Journal of Forecasting, Elsevier, vol. 23(3), pages 497-511.
- Donald L. Keefer & Samuel E. Bodily, 1983. "Three-Point Approximations for Continuous Random Variables," Management Science, INFORMS, vol. 29(5), pages 595-609, May.
- Glaser, Markus & Langer, Thomas & Weber, Martin, 2005.
"Overconfidence of Professionals and Lay Men: Individual Differences Within and Between Tasks?,"
Sonderforschungsbereich 504 Publications
05-25, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Glaser, Markus & Langer, Thomas & Weber, Martin, 2005. "Overconfidence of professionals and lay men : individual differences within and between tasks?," Papers 05-25, Sonderforschungsbreich 504.
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