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Asymmetric loss functions and the rationality of expected stock returns.

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Asymmetric loss functions and the rationality of expected stock returns. / Aretz, Kevin; Bartram, Sohnke; Pope, Peter.

In: International Journal of Forecasting, Vol. 27, No. 2, 04.2011, p. 413-437.

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Aretz, Kevin ; Bartram, Sohnke ; Pope, Peter. / Asymmetric loss functions and the rationality of expected stock returns. In: International Journal of Forecasting. 2011 ; Vol. 27, No. 2. pp. 413-437.

Bibtex

@article{db9051989f80476c87963fb1155ce251,
title = "Asymmetric loss functions and the rationality of expected stock returns.",
abstract = "We combine the innovative approaches of Elliott, Komunjer, and Timmermann (2005) and Patton and Timmermann (2007) with a block bootstrap to analyze whether asymmetric loss functions can rationalize the S&P 500 return expectations of individual forecasters from the Livingston Surveys. Although the rationality of these forecasts has often been rejected, earlier studies have relied on the assumption that positive and negative forecast errors of identical magnitudes are equally important to forecasters. Allowing for homogenous asymmetric loss, our evidence still strongly rejects forecast rationality. However, if we allow for variation in asymmetric loss functions across forecasters, not only do we find significant differences in preferences, but also we can often no longer reject forecast rationality. Our conclusions raise serious doubts about the homogeneous expectations assumption often made in asset pricing, portfolio construction and corporate finance models.",
keywords = "Financial markets, General loss functions, GMM block bootstrapping, Livingston Survey, Price forecasting",
author = "Kevin Aretz and Sohnke Bartram and Peter Pope",
year = "2011",
month = apr
doi = "10.1016/j.ijforecast.2009.10.008",
language = "English",
volume = "27",
pages = "413--437",
journal = "International Journal of Forecasting",
issn = "0169-2070",
publisher = "Elsevier Science B.V.",
number = "2",

}

RIS

TY - JOUR

T1 - Asymmetric loss functions and the rationality of expected stock returns.

AU - Aretz, Kevin

AU - Bartram, Sohnke

AU - Pope, Peter

PY - 2011/4

Y1 - 2011/4

N2 - We combine the innovative approaches of Elliott, Komunjer, and Timmermann (2005) and Patton and Timmermann (2007) with a block bootstrap to analyze whether asymmetric loss functions can rationalize the S&P 500 return expectations of individual forecasters from the Livingston Surveys. Although the rationality of these forecasts has often been rejected, earlier studies have relied on the assumption that positive and negative forecast errors of identical magnitudes are equally important to forecasters. Allowing for homogenous asymmetric loss, our evidence still strongly rejects forecast rationality. However, if we allow for variation in asymmetric loss functions across forecasters, not only do we find significant differences in preferences, but also we can often no longer reject forecast rationality. Our conclusions raise serious doubts about the homogeneous expectations assumption often made in asset pricing, portfolio construction and corporate finance models.

AB - We combine the innovative approaches of Elliott, Komunjer, and Timmermann (2005) and Patton and Timmermann (2007) with a block bootstrap to analyze whether asymmetric loss functions can rationalize the S&P 500 return expectations of individual forecasters from the Livingston Surveys. Although the rationality of these forecasts has often been rejected, earlier studies have relied on the assumption that positive and negative forecast errors of identical magnitudes are equally important to forecasters. Allowing for homogenous asymmetric loss, our evidence still strongly rejects forecast rationality. However, if we allow for variation in asymmetric loss functions across forecasters, not only do we find significant differences in preferences, but also we can often no longer reject forecast rationality. Our conclusions raise serious doubts about the homogeneous expectations assumption often made in asset pricing, portfolio construction and corporate finance models.

KW - Financial markets

KW - General loss functions

KW - GMM block bootstrapping

KW - Livingston Survey

KW - Price forecasting

U2 - 10.1016/j.ijforecast.2009.10.008

DO - 10.1016/j.ijforecast.2009.10.008

M3 - Journal article

VL - 27

SP - 413

EP - 437

JO - International Journal of Forecasting

JF - International Journal of Forecasting

SN - 0169-2070

IS - 2

ER -