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The effect of price volatility on judgmental forecasts: The correlated response model

Sobolev, D; (2017) The effect of price volatility on judgmental forecasts: The correlated response model. International Journal of Forecasting , 33 (3) pp. 605-617. 10.1016/j.ijforecast.2017.01.009. Green open access

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Abstract

Traders often employ judgmental methods when making financial forecasts. To characterize judgmental forecasts from graphically-presented time series, I propose the correlated response model, according to which the properties of judgmental forecasts are correlated with those of the forecasted series. In two experiments, participants were presented with graphs depicting synthetic price series. In Experiment 1, participants were asked to make point forecasts for different time horizons. Participants could control the graphs’ time scales. In Experiment 2, participants made multi-period forecasts, and could apply moving average filters to the graphs. The dispersion of point forecasts between participants (the standard deviation of participants’ point forecasts) and the variability of individual participant’s multi-period forecasts (local steepness and oscillation) were extracted. Both forecast measures were found to be significantly correlated with variability measures of the original, scaled, and smoothed data graphs. Thus, the results supported the correlated response model and provided insights into the forecasting process.

Type: Article
Title: The effect of price volatility on judgmental forecasts: The correlated response model
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.ijforecast.2017.01.009
Publisher version: https://doi.org/10.1016/j.ijforecast.2017.01.009
Language: English
Keywords: Trading, Financial decisions, Forecasts, Dispersion, Horizon, Fractal, Hurst exponent, Scaling, Moving average
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/1575570
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