Dataset Information

Do Survey Probabilities Match Financial Market Beliefs?

ABSTRACT: This paper considers whether survey respondents' views regarding the likelihood of stock index returns exceeding specific thresholds are comparable to market views indicated by index options with strikes at analogous thresholds. It is motivated by the observation thatthe wording used to elicit subjective beliefs in surveys about expected future returns resembles the question a purchaser of a call option might ask. Building on this association, we document a similarity between the views of survey respondents and those of financial market participants as measured through call options, although the association is not one-for-one. We find a closer association for those demonstrating a better understanding of the laws of probability, suggesting that numeracy affects the accuracy of an elicited response.

SUBMITTER: Lumsdaine RL

PROVIDER: S-EPMC6456065 | biostudies-literature | 2018

REPOSITORIES: biostudies-literature

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Do Survey Probabilities Match Financial Market Beliefs?

Lumsdaine Robin L RL van Loon Rogier J D Potter RJDP

The journal of behavioral finance 20171107 2

This paper considers whether survey respondents' views regarding the likelihood of stock index returns exceeding specific thresholds are comparable to market views indicated by index options with strikes at analogous thresholds. It is motivated by the observation thatthe wording used to elicit subjective beliefs in surveys about expected future returns resembles the question a purchaser of a call option might ask. Building on this association, we document a similarity between the views of survey ...[more]

PMID: 30976207

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Project description:Herd behaviour in financial markets is a recurring phenomenon that exacerbates asset price volatility, and is considered a possible contributor to market fragility. While numerous studies investigate herd behaviour in financial markets, it is often considered without reference to the pricing of financial instruments or other market dynamics. Here, a trader interaction model based upon informational cascades in the presence of information thresholds is used to construct a new model of asset price returns that allows for both quiescent and herd-like regimes. Agent interaction is modelled using a stochastic pulse-coupled network, parametrised by information thresholds and a network coupling probability. Agents may possess either one or two information thresholds that, in each case, determine the number of distinct states an agent may occupy before trading takes place. In the case where agents possess two thresholds (labelled as the finite state-space model, corresponding to agents' accumulating information over a bounded state-space), and where coupling strength is maximal, an asymptotic expression for the cascade-size probability is derived and shown to follow a power law when a critical value of network coupling probability is attained. For a range of model parameters, a mixture of negative binomial distributions is used to approximate the cascade-size distribution. This approximation is subsequently used to express the volatility of model price returns in terms of the model parameter which controls the network coupling probability. In the case where agents possess a single pulse-coupling threshold (labelled as the semi-infinite state-space model corresponding to agents' accumulating information over an unbounded state-space), numerical evidence is presented that demonstrates volatility clustering and long-memory patterns in the volatility of asset returns. Finally, output from the model is compared to both the distribution of historical stock returns and the market price of an equity index option.

Dataset Information

Do Survey Probabilities Match Financial Market Beliefs?

Publications

Do Survey Probabilities Match Financial Market Beliefs?

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