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Analysts' forecast error: a robust prediction model and its short-term trading profitability

Author

Listed:
  • Kris Boudt
  • Peter Goeij
  • James Thewissen
  • Geert Van Campenhout
  • Anne Wyatt

Abstract

type="main" xml:id="acfi12076-abs-0001"> This paper contributes to the empirical evidence on the investment horizon salient to trading based on predicting the error in analysts' earnings forecasts. An econometric framework is proposed that accommodates the stylized fact of extreme values in the forecast error series. We find that between 1998 and 2010, the strategy of taking a long (short) position in stocks with the most pessimistic (optimistic) I/B/E/S forecast has an annual risk-adjusted return of 16.56 per cent before transaction costs. The robust method used to predict this pessimism (optimism) and the one-week investment horizon are the key drivers of the strategy's profitability.

Suggested Citation

  • Kris Boudt & Peter Goeij & James Thewissen & Geert Van Campenhout & Anne Wyatt, 2015. "Analysts' forecast error: a robust prediction model and its short-term trading profitability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(3), pages 683-715, September.
    • Handle: RePEc:bla:acctfi:v:55:y:2015:i:3:p:683-715
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    File URL: http://hdl.handle.net/10.1111/acfi.2015.55.issue-3
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    Cited by:

    1. Qin Zhang & He Ni & Hao Xu, 2023. "Forecasting models for the Chinese macroeconomy in a data‐rich environment: Evidence from large dimensional approximate factor models with mixed‐frequency data," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 719-767, March.
    2. Emmanuel Mamatzakis & Anna Bagntasarian, 2021. "The nexus between CEO incentives and analysts' earnings forecasts," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6205-6248, October.
    3. Kris Boudt & James Thewissen, 2019. "Jockeying for Position in CEO Letters: Impression Management and Sentiment Analytics," Financial Management, Financial Management Association International, vol. 48(1), pages 77-115, March.
    4. Hu, Jun & Long, Wenbin & Luo, Le & Peng, Yuanhuai, 2021. "Share pledging and optimism in analyst earnings forecasts: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 132(C).
    5. Mamatzakis, Emmanuel, 2022. "An international study on the impact of corruption on analysts’ forecasts," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 48(C).

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