The Persistence of Miscalibration

49 Pages Posted: 11 Oct 2019

See all articles by Michael Boutros

Michael Boutros

Duke University

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

John W. Payne

Duke University - Marketing

Date Written: September 27, 2019

Abstract

Using 14,800 forecasts of one-year S&P 500 returns made by Chief Financial Officers over a 12-year period, we track the individual executives who provide multiple forecasts to evaluate how they adapt and recalibrate in response to return realizations. We present a simple model of Bayesian learning which suggests that the evolution of beliefs should be impacted by return realizations, but that stronger priors yield a sluggish response. While CFOs' forecasts are unbiased, their confidence intervals are far too narrow, implying a very strong conviction in their beliefs. Consistent with Bayesian learning, we find that when return realizations fall outside of ex-ante confidence intervals, CFOs' subsequent confidence intervals become significantly wider. However, the magnitude of the updating is apparently dampened by the tightness of prior beliefs and, as a result, miscalibration persists.

Keywords: Learning, Information, Behavioral economics, Volatility forecasts, Market forecasts, Behavioral finance, Bayesian updating, Expectations

JEL Classification: G41, G30, D02, D22, D83, D84

Suggested Citation

Boutros, Michael and Ben-David, Itzhak and Graham, John Robert and Harvey, Campbell R. and Payne, John W., The Persistence of Miscalibration (September 27, 2019). Available at SSRN: https://ssrn.com/abstract=3462107 or http://dx.doi.org/10.2139/ssrn.3462107

Michael Boutros

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John W. Payne

Duke University - Marketing ( email )

United States

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