Predictable biases in macroeconomic forecasts and their impact across asset classes

Luiz Félix, Roman Kräussl and Philip Stork

No 596, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: This paper investigates how biases in macroeconomic forecasts are associated with economic surprises and market responses across asset classes around US data announcements. We find that the skewness of the distribution of economic forecasts is a strong predictor of economic surprises, suggesting that forecasters behave strategically (rational bias) and possess private information. Our results also show that consensus forecasts of US macroeconomic releases embed anchoring. Under these conditions, both economic surprises and the returns of assets that are sensitive to macroeconomic conditions are predictable. Our findings indicate that local equities and bond markets are more predictable than foreign markets, currencies and commodities. Economic surprises are found to link to asset returns very distinctively through the stages of the economic cycle, whereas they strongly depend on economic releases being inflation- or growth-related. Yet, when forecasters fail to correctly forecast the direction of economic surprises, regret becomes a relevant cognitive bias to explain asset price responses. We find that the behavioral and rational biases encountered in US economic forecasting also exists in Continental Europe, the United Kingdom and Japan, albeit, to a lesser extent.

Keywords: anchoring; rational bias; economic surprises; predictability; stocks; bonds; currencies; commodities; machine learning (search for similar items in EconPapers)
JEL-codes: E44 F47 G14 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-big, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:596

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