Predictable Biases in Macroeconomic Forecasts and Their Impact Across Asset Classes
48 Pages Posted: 27 Jul 2017 Last revised: 22 Nov 2018
Date Written: November 20, 2018
This paper investigates how biases in macroeconomic forecasts relate to economic surprises and asset returns around US data announcements. We find that the skewness of the distribution of economic forecasts is a strong predictor of economic surprises, suggesting that forecasters behave strategically and possess private information. Our results show that consensus forecasts of macroeconomic releases embed anchoring, and the returns of assets that are sensitive to macroeconomic conditions are predictable. Local equities and bond markets are more predictable than foreign markets, currencies and commodities. Economic surprises link to asset returns very distinctively through the stages of the economic cycle, whereas they strongly depend on economic releases being inflation- or growth-related. Yet, when forecasters fail to correctly forecast the direction of economic surprises, regret becomes a relevant cognitive bias to explain asset returns. We find that these biases in US economic forecasts also exist in individual forecasters' data, and in Continental Europe, the UK and Japan.
Keywords: Anchoring; Rational Bias; Economic Surprises; Predictability; Stocks, Bonds; Currencies; Commodities; Machine learning
JEL Classification: G14; F47; E44
Suggested Citation: Suggested Citation