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

Dávid Kopányi, Jean Paul Rabanal (), Olga Rud () and Jan Tuinstra

Journal of Economic Dynamics and Control, 2019, vol. 109, issue C

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.

Keywords: Experimental finance; Market impact; Expectation formation; Asset pricing; Learning to forecast (search for similar items in EconPapers)
JEL-codes: C91 C92 D53 D84 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:109:y:2019:i:c:s0165188919301678

DOI: 10.1016/j.jedc.2019.103770

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