What do professional forecasters' stock market expectations tell us about herding, information extraction and beauty contests?

We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming thei...

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Bibliographic Details
Published in:Journal of empirical finance 2013-01, Vol.20, p.109-129
Main Authors: Rangvid, Jesper, Schmeling, Maik, Schrimpf, Andreas
Format: Article
Language:English
Subjects:
Cross-sectional analysis
Economic forecasts
Expectations formation
Financial information
Forecaster heterogeneity
Herding
Higher-order expectations
Keynesianism
Stock exchange expectations
Stock market forecasts
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Summary:We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that the average of all forecasters' beliefs influences an individual's own forecast. This effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends more on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior. ► We study how forecasters form stock market expectations based on rich micro data. ► We find that agents strongly rely on the consensus when forming their own forecasts. ► Keynes' beauty contest argument is the most likely explanation.
ISSN:0927-5398
1879-1727
DOI:10.1016/j.jempfin.2012.11.004