Scale Dependence of Overconfidence in Stock Market Volatility Forecasts
9 Pages Posted: 27 Jun 2007
Date Written: June 27, 2007
Abstract
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.
Keywords: Volatility forecast, confidence interval, individual investor, overconfidence
JEL Classification: C9, G1
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Investor Competence, Trading Frequency, and Home Bias
By John R. Graham, Campbell R. Harvey, ...
-
Investor Competence, Trading Frequency, and Home Bias
By John R. Graham, Campbell R. Harvey, ...
-
Sensation Seeking, Overconfidence, and Trading Activity
By Mark Grinblatt and Matti Keloharju
-
Talk and Action: What Individual Investors Say and What They Do
By Daniel Dorn and Gur Huberman
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity
By Richard Deaves, Erik Lueders, ...