Belief Changes and Expectation Heterogeneity in Buy- and Sell-Side Professionals in the Japanese Stock Market

We document the determinants of the expectation heterogeneity of stock price forecasters on TOPIX. Monthly panel data collected by QUICK Corporation in the Nikkei Group via surveys is utilized in the process. We examine the determinants of expectation heterogeneity by categorizing our sample into buy-side and sell-side professionals and demonstrate that the co-existence of different types of professionals contributes to the expectation heterogeneity. We show that buy-side and the sell-side professionals, who possess different business goals, differentiate the information contents as well as their interpretations of the same information in their forecasts, contributing to the expectation heterogeneity. In addition, we investigate the interactive expectation formulation of buy-side and sell-side professionals and find that buy-side professionals incorporate the sell side's ideas regarding future stock prices into their own forecasts, but refer exclusively to their own ideas when relating foreign exchange rates to future stock prices. Meanwhile, sell-side professionals tend to utilize buy-side professionals' ideas about future prices in order to improve their research and ingratiate themselves to their clients, that is, to the buy-side professionals. We demonstrate that this interactive expectation formulation also contributes to the generation of the expectation heterogeneity.