An exploratory analysis of portfolio managers' probabilistic forecasts of stock prices

Abstract

This study reports the results of an experiment that examines (1) the effects of forecast horizon on the performance of probability forecasters, and (2) the alleged existence of an inverse expertise effect, i.e., an inverse relationship between expertise and probabilistic forecasting performance. Portfolio managers are used as forecasters with substantive expertise. Performance of this ‘expert’ group is compared to the performance of a ‘semi‐expert’ group composed of other banking professionals trained in portfolio management. It is found that while both groups attain their best discrimination performances in the four‐week forecast horizon, they show their worst calibration and skill performances in the 12‐week forecast horizon. Also, while experts perform better in all performance measures for the one‐week horizon, semi‐experts achieve better calibration for the four‐week horizon. It is concluded that these results may signal the existence of an inverse expertise effect that is contingent on the selected forecast horizon.