Can competition between forecasters stabilize asset prices in learning to forecast experiments?

Dávid Kopányi, Jean Paul Rabanal Sobrino, Olga A. Rud, Jan Tuinstra

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We conduct a learning to forecast asset pricing experiment that assumes that financial advisors and professional forecasters attract more investors when their price forecasts are more accurate. The competition between forecasters implies that the impact of their forecasts on realized market prices evolves endogenously. We investigate how these endogenous impacts affect price dispersion and mispricing relative to the fundamental price. Our results show that the effect of endogenous impacts depends on (i) the type of market dynamics (stable/unstable) and (ii) the sensitivity of impacts with respect to forecast accuracy (low/high). Compared to the baseline treatment, where impacts are constant and independent of forecast accuracy, price dispersion and mispricing is somewhat lower in stable markets when impacts are moderately sensitive to forecast accuracy. In contrast, impacts that are strongly sensitive to forecast accuracy can further destabilize unstable markets, amplifying price dispersion and mispricing.

Original languageEnglish
Article number103770
Number of pages25
JournalJournal of Economic Dynamics and Control
Volume109
DOIs
Publication statusPublished - 1 Dec 2019

Keywords

  • Asset pricing
  • Expectation formation
  • Experimental finance
  • Learning to forecast
  • Market impact

Cite this

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Can competition between forecasters stabilize asset prices in learning to forecast experiments? / Kopányi, Dávid; Rabanal Sobrino, Jean Paul; Rud, Olga A.; Tuinstra, Jan.

In: Journal of Economic Dynamics and Control, Vol. 109, 103770, 01.12.2019.

Research output: Contribution to journalArticleResearchpeer-review

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AU - Kopányi, Dávid

AU - Rabanal Sobrino, Jean Paul

AU - Rud, Olga A.

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AB - We conduct a learning to forecast asset pricing experiment that assumes that financial advisors and professional forecasters attract more investors when their price forecasts are more accurate. The competition between forecasters implies that the impact of their forecasts on realized market prices evolves endogenously. We investigate how these endogenous impacts affect price dispersion and mispricing relative to the fundamental price. Our results show that the effect of endogenous impacts depends on (i) the type of market dynamics (stable/unstable) and (ii) the sensitivity of impacts with respect to forecast accuracy (low/high). Compared to the baseline treatment, where impacts are constant and independent of forecast accuracy, price dispersion and mispricing is somewhat lower in stable markets when impacts are moderately sensitive to forecast accuracy. In contrast, impacts that are strongly sensitive to forecast accuracy can further destabilize unstable markets, amplifying price dispersion and mispricing.

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