Scale Dependence of Overconfidence in Stock Market Volatility Forecasts

9 Pages Posted: 27 Jun 2007

See all articles by Markus Glaser

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Martin Weber

University of Mannheim - Department of Banking and Finance

Thomas Langer

University of Muenster - Finance Center

Jens Reynders

Siemens Management Consulting

Date Written: June 27, 2007

Abstract

In this study, we analyze whether volatility forecasts (judgmental confidence intervals) are influenced by the specific elicitation mode (i.e. whether forecasters have to state future price levels or directly future returns as upper and lower bounds). We present questionnaire responses of about 250 students from two German universities. Participants were asked to state median forecasts as well as confidence intervals for seven stock market time series. Using a between subject design, one half of the subjects was asked to state future price levels, the other group was directly asked for returns. Consistent with prior research we find that subjects underestimate the volatility of stock returns, indicating overconfidence. As a new insight, we find that the strength of the overconfidence effect in stock market forecasts is highly significantly affected by the fact whether subjects provide price or return forecasts. Volatility estimates are lower (and the overconfidence bias is thus stronger) when subjects are asked for returns compared to price forecasts.

Keywords: Volatility forecast, confidence interval, individual investor, overconfidence

JEL Classification: C9, G1

Suggested Citation

Glaser, Markus and Weber, Martin and Langer, Thomas and Reynders, Jens, Scale Dependence of Overconfidence in Stock Market Volatility Forecasts (June 27, 2007). Available at SSRN: https://ssrn.com/abstract=996849 or http://dx.doi.org/10.2139/ssrn.996849

Markus Glaser (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstra├če 4
Munich, 80539
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

Jens Reynders

Siemens Management Consulting ( email )

St.-Martin-Str. 76
D-81541 Munich
Germany

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