The Finance Brown Bag Seminar is held by the Institute for Finance, Banking and Insurance (WU Vienna) and the Vienna Graduate School of Finance (VGSF). It serves as a presentation platform for PhD students, faculty members, and visitors. An overview of BBS on the website of the Institute for Finance, Banking and Insurance.
Martijn Boons, Tilburg School of Economics and Management
On the Determinants of Stock Return Forecasts: Causal Evidence from Macro Shocks
Recent literature argues that subjective forecasts of professionals and non-professionals are anomalous. In particular, there is a lively debate whether forecasts of stock returns are pro-, a-, or countercyclical. This debate revolves around standard predictive regressions, which yield little insight into the model that is used by forecasters. For instance, a high price-to-dividend ratio may result from low risk or high sentiment. We contribute to this literature by studying how subjective forecasts respond to three well-identified macroeconomic shocks: business cycle shocks, tfp news, and oil supply shocks. We find that the response of professional forecasts is strong relative to non-professionals and countercyclical. Furthermore, the shocks explain a large fraction of the historical variation in the difference between the professional forecast and an objective forecast. Finally, we show that the response of professional forecasts is consistent with the response of realized returns, which suggests that professionals believe returns are about as sensitive to fundamentals as they have turned out to be ex post. We conclude that financial market participants should turn to professionals to receive an early estimate of the stock market impact of large shocks.