Predictable Biases in Macroeconomic Forecasts and Their Impact Across Asset Classes

48 Pages Posted: 27 Jul 2017 Last revised: 22 Nov 2018

See all articles by Luiz F. F. Felix

Luiz F. F. Felix

APG Asset Management

Roman Kräussl

Luxembourg School of Finance; Hoover Institution, Stanford University

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: November 20, 2018

Abstract

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

Felix, Luiz F. F. and Kraeussl, Roman and Stork, Philip A., Predictable Biases in Macroeconomic Forecasts and Their Impact Across Asset Classes (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=3008976 or http://dx.doi.org/10.2139/ssrn.3008976

Luiz F. F. Felix (Contact Author)

APG Asset Management ( email )

Gustav Mahlerplein 3
Amsterdam, 1082 MS
Netherlands

Roman Kraeussl

Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg
+3524666445442 (Phone)

HOME PAGE: http://www.art-finance.com

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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