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Generalised Rational Bias in Financial Forecasts

Content Provider	Springer Nature Link
Author	Christodoulakis, George A.
Copyright Year	2006
Abstract	Laster et al. (Q J Econ 114(1):293–318, 1999) built an economic model in which forecasters have incentives to generate forecasts that differ form the consensus. It is shown that the dispersion of the equilibrium distribution of forecasters, depends on the relative importance given on the intensive forecast users’ loss versus the publicity gain from occasional users. These results depend heavily on the assumption of symmetry for the loss and density functions. In this paper we examine the effects of generalising loss preferences and probability densities to allow for asymmetries through the LinEx loss and the Skewed Normal density, respectively. We derive the generalised equilibrium distribution of forecasts which contains the results of Laster et al. as a special case. The presence of asymmetric preferences is shown to cause a movement of the distribution away from the conditional mean, towards the optimal forecast under loss asymmetry. Furthermore, forecasts now tend to cluster around this quantity in an asymmetric way. These effects tend to be further strengthened or partially offset by the presence of skewness in the distribution of data, a result consistent with the conclusions of Christodoulakis (Finan Res Lett 2:227–233, 2005).
Starting Page	397
Ending Page	405
Page Count	9
File Format	PDF
ISSN	16142446
Journal	Annals of Finance
Volume Number	2
Issue Number	4
e-ISSN	16142454
Language	English
Publisher	Springer-Verlag
Publisher Date	2006-05-04
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Asymmetric preferences Distribution of forecasters LinEx Non-normality Optimal forecasts Skewed normal Finance /Banking Macroeconomics/Monetary Economics Quantitative Finance
Content Type	Text
Resource Type	Article
Subject	Finance

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