A Note on Forecasting Emerging Market Exchange Rates: Evidence of Anti‐herding

Using survey forecasts of a large number of Asian, European, and South American emerging market exchange rates, we studied empirically whether evidence of herding or anti‐herding behavior of exchange‐rate forecasters can be detected in the cross‐section of forecasts. Emerging market exchange‐rate forecasts are consistent with herding (anti‐herding) if forecasts are biased towards (away from) the consensus forecast. Our empirical findings provide strong evidence of anti‐herding of emerging market exchange‐rate forecasters.     

Oil price forecasting under asymmetric loss

Based on the approach developed by Elliott et al. (2005), we found that the loss function of a sample of oil price forecasters is asymmetric in the forecast error. Our findings indicate that the loss oil price forecasters incurred when their forecasts exceeded the price of oil tended to be larger than the loss they incurred when their forecast fell short of the price of oil. Accounting for the asymmetry of the loss function does not necessarily make forecasts look rational.     

Do Current Account Forecasters Herd? Evidence from the Euro Area and the G7 Countries

Data from the Consensus Economics Forecast Poll is used to analyze how current account forecasters form expectations. The results suggest that forecasts do not satisfy traditional unbiasedness and orthogonality criteria for forecast rationality. In addition, this paper finds anti‐herding behavior among forecasters for the euro area and G7 countries. It also shows that the cross‐sectional heterogeneity with regard to anti‐herding is associated with cross‐sectional heterogeneity in forecast accuracy. More specifically, this paper finds some evidence indicating that forecasters who tend to herd provide more accurate forecasts than their colleagues who follow an anti‐herding strategy.     

Herding,Faith-Based Investments and the Global Financial Crisis: Empirical Evidence From Static and Dynamic Models

The purpose for this article is to explore the existence of herding behavior in the context of Shariah-based ethical investments. To this end the authors have employed the highly liquid constituent stocks of the U.S. Dow Jones Islamic Index for the period January 2007 to December 2014. The methodology encompasses both static and dynamic models that capture potential time-varying patterns or asymmetric behavior of herding. Summarizing the results, the authors document significant antiherding behavior that is robust across different formulations and testing procedures. Most interestingly, they observe an asymmetric behavior of the antiherding phenomenon. Results from the dynamic analysis reveal that antiherding tends to be more intense during turbulent periods. The findings may entail useful implications for investors who wish to diversify their portfolios using faith-based investments.     

Asymmetric Loss and the Rationality of Inflation Forecasts: Evidence from South Korea

We examine asymmetry in the loss functions of South Korean consumers' and the Bank of Korea's (BOK) inflation forecasts, and test the rationality of these forecasts under the assumption of a possible asymmetric loss function. Under an asymmetric loss function, we find evidence of asymmetry and support for rationality. We also examine whether the BOK's forecasts incorporate respective forecasts and consensus forecasts efficiently. They broadly use available information efficiently, and their results are robust to inflation‐targeting measures and the recent global financial crisis. However, our results suggest that the information efficiency of the BOK's forecasts for consumers was affected during the period 2007–2008.     

Forecasting Housing Approvals in Australia: Do Forecasters Herd?

Price trends in housing markets may reflect herding of market participants. A natural question is whether such herding, to the extent that it occurred, reflects herding in forecasts of professional forecasters. Using more than 6,000 forecasts of housing approvals for Australia, we did not find evidence of forecaster herding. On the contrary, forecasters anti‐herd and, thereby, tend to intentionally scatter their forecasts around the consensus forecast. The extent of anti‐herding seems to vary over time. We also found that more pronounced anti‐herding leads to less accurate forecasts.     

A Note on Forecasting the Euro: Do Forecasters Have an Asymmetric Loss Function?

Based on the approach advanced by Elliott, Komunjer, and Timmermann (2005 Elliott, G., Komunjer, I., & Timmermann, A. (2005). Estimation and testing of forecast rationality under flexible loss. Review of Economics Studies, 72, 1107–1125. doi: 10.1111/0034-6527.00363[Crossref], [Web of Science ®] , [Google Scholar]), we analyzed whether the loss function of a sample of exchange-rate forecasters is asymmetric in the forecast error. Using forecasts of the dollar/euro exchange rate, we found that the shape of the loss function varies across forecasters. Some forecasters appear to make forecasts under an asymmetric loss function, while a symmetric loss function seems to describe well the loss function of other forecasters. Accounting for an asymmetric loss function does not necessarily make forecasts ‘look’ rational.     

Investors’ fear and herding in the stock market

ABSTRACT

In this article, we examine herding in three developed stock markets testing for the impact of investors’ ‘fear’ on herding estimations. To this end, we employ daily data of all listed stocks from USA, UK and Germany from January 2004 to July 2014. We examine herd behaviour applying the cross-sectional dispersion approach. Moreover, we investigate the asymmetric herding behaviour under different market states and sub-periods. The stock markets under examination provide comparable implied volatility indices which are used as a proxy for fear. As a result, apart from the standard herding estimations within and across markets, we also augment the benchmark model with the fear indicator. Our empirical results document the statistically significant impact of fear on herding estimations. Moreover, there is evidence of cross market herding as well as evidence of herding in the UK during specific sub-periods.     

State dependent asymmetric loss and the consensus forecast of real U.S. GDP growth

It has been well documented that the consensus forecast from surveys of professional forecasters shows a bias that varies over time. In this paper, we examine whether this bias may be due to forecasters having an asymmetric loss function. In contrast to previous research, we account for the time variation in the bias by making the loss function depend on the state of the economy. The asymmetry parameter in the loss function is specified to depend on set state variables which may cause forecaster to intentionally bias their forecasts. We consider both the Lin–Ex and asymmetric power loss functions. For the commonly used Lin–Ex and Lin–Lin loss functions, we show the model can be easily estimated by least squares. We apply our methodology to the consensus forecast of real U.S. GDP growth from the Survey of Professional Forecasters. We find that forecast uncertainty has an asymmetric effect on the asymmetry parameter in the loss function dependent upon whether the economy is in expansion or contraction. When the economy is in expansion, forecaster uncertainty is related to an overprediction in the median forecast of real GDP growth. In contrast, when the economy is in contraction, forecaster uncertainty is related to an underprediction in the median forecast of real GDP growth. Our results are robust to the particular loss function that is employed in the analysis.     

Rationality of inflation–output forecasts of MMS survey: international evidence

We analyse the individual rationality of inflation and output forecasts from Money Market Survey (MMS) for a group of G7 countries and EU under asymmetric univariate Linlin and Linex loss functions. We also test for joint rationality of inflation–output forecasts using the forecast rationality test under multivariate asymmetric loss functions proposed by Ulu (2013). Our results indicate that rationality is often rejected under symmetric loss, and results improve towards rationality when asymmetric loss functions are assumed. The assumption of multivariate asymmetric loss compared to univariate asymmetric loss provides further evidence towards rationality. We also analyse directional forecast accuracy of the inflation and output forecasts and find that the inflation–output forecasts of MMS are valuable when considered both jointly and separately.     

German business cycle forecasts, asymmetric loss and financial variables

We examine the efficiency of German forecasts for output growth and inflation allowing for an asymmetric loss function of the forecasters. We find the loss of output growth forecasts to be approximately symmetric while there is an asymmetry in the loss of the inflation forecasts. The information of financial variables seems to be adequately incorporated into the output forecasts but to a lesser extent into the inflation forecasts.     

On the loss function of the Bank of Canada: A note

Based on the approach advanced by Elliott et al. [Elliott, G., Komunjer, I., Timmermann, A., 2005. Estimation and testing of forecast rationality under flexible loss. Review of Economic Studies 72, 1107-1125], we studied whether the inflation and output growth projections published by the Bank of Canada are consistent with an asymmetric loss function. Current-year projections provide no signs of asymmetry, but next-year projections do. The hypothesis of rationality of the projections can be rejected under symmetric loss, but not under asymmetric loss.     

Herding in Chinese stock markets: a nonparametric approach

The paper reports new evidence of herding in the Chinese A-type and B-type markets by employing nonparametric kernel regression. We find statistically significant evidence of herding in A-type market under both extreme high and low market returns. Herding in B-type market, which predominantly consists of foreign investors, indicates only weak evidence of herding. We do not find any statistically significant evidence of herding in the pre-2001 sample of B-type market, when only foreign investors could do the trading. Lack of knowledge and experience of local investors may be attributed to the presence of herd behaviour in the Chinese markets.     

Pension Fund Herding and the Influence of Management Style

In this article, we study the herding phenomenon in Spanish equity pension funds with European investment locations from 2002 to 2012, considering whether the development of different investment strategies by the managers results in herding. In addition, we analyze the performance-herding relationship, observing whether pension fund performance decreases or increases when pension funds herd. Using the herding measure of Lakonishok et al. [1992], we do not find strong imitation behavior, although herding in the market and book-to-market styles are higher. Those pension funds that do not herd or that follow distinctive strategies do not present significant differences in performance with respect to herding funds.     

Reexamining the PPP hypothesis: A nonlinear asymmetric heterogeneous panel unit root test

In this study, we re-examine the PPP hypothesis in the light of the new developments in the unit root testing literature. The recent theoretical findings have pointed out that the real exchange rate series exhibit asymmetric nonlinear behavior. A unit root test applied to analyze the PPP hypothesis therefore, should also take into account this asymmetry inherent in the real exchange rate. Different unit root tests that consider the presence of these data features have been developed in the time series literature. However, a true attempt to test the PPP hypothesis should take a panel data approach. To this end, we propose a nonlinear heterogeneous panel unit root test where the alternative hypothesis allows for symmetric or asymmetric exponential smooth transition autoregressive nonlinearity and provide its finite sample properties. We apply our test to the real exchange rates of the 15 European Union countries against the US dollar. While the results of the linear and symmetric nonlinear heterogeneous panel unit root tests are against the PPP hypothesis, the asymmetric nonlinear heterogeneous panel test that we propose gives support for the PPP hypothesis as expected. Therefore, the conclusions drawn from the linear panel unit root tests or the nonlinear panel unit root tests that do not take asymmetry into account might be misleading.     

Re-examining the Chinese A-share herding behaviour with a Fama-French augmented seven-factor model

ABSTRACT

In view of the contradicting results in existing research, this article proposes a new weighted cross-sectional variance (WCSV) model to re-examine the level of herding behaviour in the Chinese A-share market. Motivated by the original WCSV model, we utilize a Fama-French augmented seven-factor model as the underlying Arbitrage Pricing Theory model, which introduces the trading volume and turnover rate factors to the Fama-French five-factor model. The regression results show the superiority of our new model compared to the WCSV model based on Fama-French three- and five-factor models, which implies that the empirical findings of herding with our WCSV model are more reliable in relative terms. In the empirical aspect, in addition to testing the herding level yearly and integrally, to provide further insight on the relationship between market stress and herding, we apply our model to the Chinese A-share herding behaviour within each of three well-known crisis periods. In addition, we also split the sub-samples into pre-crisis and post-crisis periods to detect the existence of asymmetric herding behaviour for different market directions. Our findings suggest that Chinese A-share herding behaviour is more prevalent during large market turmoil, especially under condition of down market.     

Herding on lottery-type stocks: evidence from the Chinese stock market

Previous studies have provided evidence that investors have gambling propensity in the stock market and exhibit a preference for lottery-type stocks. In this study, we use high total skewness and high maximum daily return (MAX) to measure lottery-type stocks and examine whether investors do exhibit distinct herding pattern in these stock types. Empirical results show that investors display stronger herding among lottery-type stocks, thereby indicating that such stocks induce correlated behaviour with the investors. In addition, we find that stocks with the highest skewness exhibit stronger herding under upmarkets, whereas stocks with the lowest skewness display stronger herding under downmarkets. Regarding the highest MAX portfolio, no significant herding asymmetry is seen between upmarket and downmarket. The results reported in this article demonstrate that comovement in stock returns may be partly attributed to the nonstandard preferences of investors in the stock market.     

Revealing asymmetries in the loss function of WTI oil futures market

This paper examines behavioural aspects of the West Texas Intermediate (WTI) oil 1-month futures from 1995 to 2012. We consider that oil futures are formed based on an underlying generalised loss function with an unknown shape parameter that provides information regarding preferences. Even without observing fundamentals of WTI oil futures we can assess whether preferences lean towards a symmetric or asymmetric loss function. Our empirical evidence is robust across information sets and shows that overall loss preferences of WTI 1-month oil futures are rather optimistic and thus the underlying loss function is asymmetric. This implies that if one disregards this asymmetry the WTI oil futures should not be viewed as rational. We further provide statistical tests that allow deviations from a symmetric loss function. As part of a sensitivity analysis, and given the long span of our sample, we perform a novel analysis for detecting breakdowns in our series over time. Based on this analysis we re-examine the shape parameters of the loss function for WTI oil month futures for sub-periods. Interestingly, preferences of WTI 1-month oil futures have shifted towards optimism post 2008 period, marking the collapse of Lehman Brothers.     

The effect of investment and withdrawal horizons on myopic loss aversion

Using unique survey data, we find that a longer investment horizon (6–10 years and 11+ years) reduces the likelihood of exhibiting myopic loss aversion (MLA) compared to an investment horizon of less than 2 years. In addition, we find that investors with higher levels of assets under management (AUM) are less likely to exhibit MLA compared to the lowest AUM quartile.     

Do forecasters of major exchange rates herd?

This paper uses forecast data from 1995 through 2014 to examine, whether the market consensus of exchange rate forecasts has an effect on the forecasts of individual experts. Such an effect could take the form of herding or anti-herding. We use a very comprehensive data set to study experts' forecasts of three of the most important exchange rates. The results indicate that anti-herding vis-à-vis the consensus of forecasts occurs more often than herding. We also show how the increase in the forecasting horizon and financial crises affect the intensity of anti-herding behavior. Moreover, we report that the (anti-)herding behavior does not affect the forcasting performnce.