Who are better forecasters? Equity guys or Bond guys?

There is always a war between the two groups in fin markets. Equity camp believes they do a better job and Bond guys believe they do a better job. Some say equity markets are more sophisticated and transparent with large number of companies, quarterly reporting of companies earnings etc. Bond guys say we track macroeconomics and all that hence we are better placed..

In this BoJ paper, there are some interesting results:

Estimation results in this paper show that (i) professional forecasts are behavioral, namely, significantly influenced by past forecasts, (ii) there exists a stock{bond dissonance: while forecasting behavior in the stock market seems to be herding, that in the bond market seems to be bold in the sense that their current forecasts tend to be negatively related to past forecasts, and (iii) the dissonance is due at least partially to the individual forecasters’ behavior that is influenced by their own past forecasts rather than others’. We also show that contrary to the previous studies such as Hong, Kubik, and Solomon (2000) and Lamont (2002), the degree of such behavioral forecasting as herding or bold in the Japanese financial markets has little to do with individual experiences as professional forecasters.

These are new results and altogether imply a complex forecasting behavior in the Japanese financial markets. Even in the same country, forecasting behavior is quite different by market. This suggests that the nature of professionals in the stock market is fundamentally different from that in the bond market.

This kind of forecasting is different as here we are forecasting asset prices and moreover this is not published. So people do not care much for the reputation of the forecasts unlike the published forecasts of macro variables like GDP, inflation etc.

However, the paper has left this difference between equity guys and bond guys for future research:

We have shown that this dissonance stems, at least partially, from the difference in the individual forecasting behavior between the stock and the bond markets: sticky forecasts in the stock market and excess sensitivity in forecasts in the bond market. Yet, we have not investigated the structural  reason behind this dissonance. This requires a microeconomic modelling of professional forecasters. Structural understanding of this dissonance is left for our future research.

Looking forward to the research…

Frankly, having worked in the bond market space for a while I am not sure what brings this difference.. I would believe bond markets forecasters herd quite a bit as well…


One Response to “Who are better forecasters? Equity guys or Bond guys?”

  1. Prasad Hegde Says:

    I agree that stock forecasters/speculators do follow herd principle , however the market structure of stocks and bonds are quite different . There are lot many “forecasting factors” for stocks than for bonds and higher asymmetric information in stock markets makes it easier to follow the herd . Certainly information asymmetry is prevalent in bond markets but the “compounding effect ” ( information asymmetry * forecasting parameters(ex: inflation,lending rates,coupon etc)] in bonds is less than [information asymmetry * stock forecasting parameters (earnings,input prices,regulatory,acquisition etc)

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