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Academic Lecture: Excess Volatility in Professional Stock Return Forecasts

Topic: Excess Volatility in Professional Stock Return Forecasts

Speaker: Professor Rossen Valkanov, Rady School of Management, University of California, San Diego

Moderator: Professor Jun Liu, Institute of Financial Studies, Southwestern University of Finance and Economics

Time: July 5th, 10:00-11:30 AM

Venue: Room 202, Institute of Financial Studies, Building 35, Guanghua Campus

Organizers: Institute of Financial Studies, Office of International Exchange and Cooperation, Office of Scientific Research

Speaker’s Profile:

Rossen Valkanov is the Zable Endowed Chair in Management and Professor of Finance at the Rady School of Management, the University of California, San Diego, and the inaugural Co-Director of the new Master’s in Finance program. He received his Ph.D. in Economics from Princeton University. His main research interests are in the areas of empirical finance, financial econometrics, financial forecasting, risk management, portfolio allocation, and real estate. Professor Valkanov has authored numerous articles and book chapters. His research has been published in some of the most prestigious peer-reviewed journals, such as the Journal of Finance, Journal of Financial Economics, and Review of Financial Studies. Empirical methods and big data applications based on his research—such as Mixed Data Sampling Regressions (MIDAS), parametric portfolio approaches, and forecasting procedures—have received significant interest from finance industry practitioners. He is currently the Editor of the Journal of Empirical Finance. Professor Valkanov has taught at UCLA, UC Berkeley, Princeton, and various other institutions in the US and abroad. He is an award-winning educator and teaches regularly in the Masters of Finance, MBA, and Executive MBA programs at UCSD. He is a member of many professional organizations, including the American Finance Association, the American Economic Association, the Econometric Society, and the American Real Estate and Urban Economics Association.

Lecture Preview:

Consensus professional stock return forecasts are three times more volatile than those of non-professionals and econometricians. This “excess” volatility primarily stems from professionals' strong countercyclical response to macro shocks, which account for at least 50\% of total variation in forecast-differences. Employing a novel two-stage least squares procedure, we identify the discount rate variation in professional forecasts due to macro shocks and show this variation aligns qualitatively and quantitatively with ex post realized returns and implications of rational asset pricing models. We conclude that professionals adeptly evaluate the impact of discount rate shocks and well before the total impact on (macroeconomic) growth is materialized. Thus, we challenge models of the expectation formation process, which should account for heterogeneity across forecasters as well as the variable being forecasted.



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