Predicting the Unpredictable: New Experimental Evidence on Forecasting Random Walks

46 Pages Posted: 27 Jul 2022

See all articles by Te Bao

Te Bao

Nanyang Technological University (NTU) - Division of Economics

Brice Corgnet

Chapman University - Economic Science Institute; Chapman University - The George L. Argyros School of Business & Economics

Nobuyuki Hanaki

Osaka University - Institute of Social and Economic Research

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics

Jiahua Zhu

Ma Yinchu School of Economics

Date Written: July 22, 2022

Abstract

We investigate how individuals use measures of apparent predictability from price charts to predict future market prices. Subjects in our experiment predict both random walk times series, as in the seminal work by Bloomfied and Hales (2002) (BH), and stock price time series. We successfully replicate the experimental findings in BH that subjects are less trend-chasing when there are more reversals in the first task. We find that subjects also overreact less to the trend when there is less momentum in the stock price in the second task, though the momentum factor that is significant is the autocorrelation instead of the number of reversals per se. Our subjects also appear to use other variables such as amplitude and volatility as measures of predictability. However, as random walk theory predicts, relying on apparent patterns in past data does not improve their prediction accuracy.

Keywords: Asset Prices, Regime-switching, Price Prediction, Experimental Finance

JEL Classification: C91, D91, D84, G41

Suggested Citation

Bao, Te and Corgnet, Brice and Hanaki, Nobuyuki and Riyanto, Yohanes E. and Zhu, Jiahua, Predicting the Unpredictable: New Experimental Evidence on Forecasting Random Walks (July 22, 2022). Available at SSRN: https://ssrn.com/abstract=4169343 or http://dx.doi.org/10.2139/ssrn.4169343

Te Bao (Contact Author)

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Brice Corgnet

Chapman University - Economic Science Institute ( email )

One University Dr.
Orange, CA 92866
United States

Chapman University - The George L. Argyros School of Business & Economics ( email )

One University Dr.
Orange, CA 92866
United States

Nobuyuki Hanaki

Osaka University - Institute of Social and Economic Research ( email )

6-1, Mihogaoka
Ibaraki, Osaka 567-0047
Japan

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Jiahua Zhu

Ma Yinchu School of Economics ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
48
Abstract Views
182
PlumX Metrics