Who Values Economist Forecasts? Evidence From Trading in Treasury Markets

James, Robert; Jarnecic, Elvis; Leung, Henry

doi:10.2139/ssrn.3483356

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Who Values Economist Forecasts? Evidence From Trading in Treasury Markets

Journal of Financial Intermediation, Forthcoming

51 Pages Posted: 20 Nov 2019 Last revised: 30 Sep 2021

See all articles by Robert James

Elvis Jarnecic

The University of Sydney; Financial Research Network (FIRN)

Henry Leung

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: September 16, 2021

Abstract

While economic forecasting is ubiquitous within the industry, its role in the trading process has received little attention in the literature. We examine how economist forecasts are related to trading activity in the OTC treasury bond market at the participant level. Consistent with models of heterogeneous opinions, we show that the forecasting economist’s employing institution places a disproportionately large reliance on the forecast. There is pervasive evidence that this reliance is asymmetric. Only forecasts which imply a fall in future treasury bond prices are associated with an abnormal trading reaction consistent with the forecast. Reference dependence and loss aversion offer one possible explanation for this asymmetric trading response.

Keywords: Over-The-Counter markets, Market microstructure, Treasury Bond markets, Macroeconomic information, Research analyst forecasts

JEL Classification: E44, G12, G14, G21

Suggested Citation: Suggested Citation

James, Robert and Jarnecic, Elvis and Leung, Henry, Who Values Economist Forecasts? Evidence From Trading in Treasury Markets (September 16, 2021). Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3483356 or http://dx.doi.org/10.2139/ssrn.3483356