Crises, market shocks, and herding behavior in stock price forecasts

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Crises, market shocks, and herding behavior in stock price forecasts Yoichi Tsuchiya1 Received: 22 July 2019 / Accepted: 26 May 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020

Abstract This study examines the (anti-) herding behaviors of stock price forecasters, focusing on whether their behaviors are time-varying. It studies stock price forecasts for the Nikkei 225 price index from the ESP Forecast in Japan based on nonparametric methods. Empirical results show that stock price forecasters are likely to anti-herd, and the uncertainty caused by financial crises and market shocks is related to the prevalence of (anti-) herding. This study finds that an increase in forecast uncertainty works in both directions, toward herding and anti-herding. Unprecedented shocks, including the financial crises, European sovereign debt crisis, and newly introduced policy packages by Abenomics, increase incentives to differentiate forecasts from others, possibly due to reputation or superstar effects. However, some market shocks, including the BNP Paribas shock and the China shock, intensified herding or lessened anti-herding. Keywords  Stock price · (Anti-) herding · Financial crisis · European sovereign debt crisis · Superstar effect · Abenomics JEL Classification  G17 · E44

1 Introduction Stock markets play a central role in economics and finance because financial markets, including stock and bond markets, enhance economic efficiency by channeling funds from people who do not use it productively to those who do. Activities in financial markets also have a direct effect on personal wealth, the behavior of businesses and consumers, and the business cycles of an economy. Thus, considerable attention has been paid to the movement of future stock prices. Since one of the first * Yoichi Tsuchiya [email protected] 1



Graduate School of International Cultural Studies, Tohoku University, 41 Kawauchi, Aoba‑ku, Sendai 980‑8576, Japan

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statistical studies to evaluate how well professional forecasters predict stock price was undertaken by Cowles (1933), studies were conducted on whether stock price forecasts are in line with rational expectation. Lakonishok (1980), Brown and Maital (1981), and Pearce (1984) found that the Livingston stock market forecasts are not rational and are biased or inefficient, whereas Dokko and Edelstein (1989) found that stock market forecasts are rational. These studies provide mixed evidence of the rationality of stock price forecasts in the Livingston survey, because they examined different sample periods. As stock price development has been influenced by the way in which expectations are formed, expectation formation of stock prices is also a critical consideration. Global financial markets witnessed stock market crashes all over the world in 2007 and 2008, with substantial worldwide impacts. The global financial crisis began in August 2007, with defaults in the subprime mortgage market that led to the worst financial crisis since the Great