סמינר במימון חשבונאות

Speaker: Doron Sonsino, Cyprus International Institute of Management

The Decrease in Confidence with Forecast Extremity

Joint work with Yefim Roth (Haifa University)

Abstract:

Three return forecasting experiments and a panel of more than 14,000 CFOs’ forecasts of the S&P 500 annual return suggest that forecast confidence decreases as the forecasts diverge from zero, in the positive or negative direction. The decrease in confidence reflects in longer forecast intervals, weaker belief in the accuracy of the forecasts, and larger perceived volatility estimates. Assuming cumulative prospect theory, the increase in perceived volatility with forecast optimism is fast enough to fully offset the CFOs’ response to more optimistic expectations in about 20% of the cross-sample comparisons. Permutation tests, more generally, confirm that the decrease in confidence significantly delays the response to optimistic forecasts. The decrease in confidence alleviates the underestimation of volatility in cases of optimistic forecasts, but even the optimistic CFOs underestimate the VIX volatility by more than 50%. A complementary empirical analysis reveals significant cross-sectional and time-series correlations between the absolute realized returns on the stocks composing the S&P 500 list and estimates of the stocks’ contemporaneous volatility. The correlations emerge in five levels of analysis and separately show for positive and negative sub-sequences of the returns.