Who Values Economist Forecasts? Evidence From Trading in Treasury Markets

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