Scale Dependence of Overconfidence in Stock Market Volatility Forecasts

Markus Glaser (), Thomas Langer (), Jens Reynders () and Martin Weber
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Markus Glaser: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim
Thomas Langer: Westfälischen Wilhelms-Universität Münster Lehrstuhl für BWL, insbesondere Finanzierung, Postal: Universitätsstraße 14-16 48143 Münster

No 08-22, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

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.

Pages: 15 pages
Date: 2008-12-03
New Economics Papers: this item is included in nep-cbe, nep-for and nep-neu
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Working Paper: Scale dependence of overconfidence in stock market volatility forecasts (2008)
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