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

54 Pages Posted: 20 Sep 2009 Last revised: 22 Feb 2012

See all articles by Jesper Rangvid

Jesper Rangvid

Copenhagen Business School

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen

Date Written: February 3, 2012

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 expectations about the average of all forecasters' forecasts influences an individual's own forecast and that this effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate otherwise 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: Higher-Order Expectations, Stock Market Forecasts, Forecaster Heterogeneity

JEL Classification: G10, G15, G17

Suggested Citation

Rangvid, Jesper and Schmeling, Maik and Schrimpf, Andreas, What do Professional Forecasters' Stock Market Expectations tell us about Herding, Information Extraction and Beauty Contests? (February 3, 2012). ZEW - Centre for European Economic Research Discussion Paper No. 09-042, Available at SSRN: https://ssrn.com/abstract=1473652 or http://dx.doi.org/10.2139/ssrn.1473652

Jesper Rangvid (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
DENMARK

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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