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Why stock analysts may make wrong predictions?

Author

Listed:
  • Harel, Arie
  • Harpaz, Giora

Abstract

Investors and financial analysts employ various mathematical and statistical methods to forecast stock prices. An investor or a stock analyst with a superior forecasting method can harvest huge and almost riskless profits. This is the reason why so many people are investing time and money enthusiastically in developing methods to correctly predict future stock prices. In this note, we demonstrate that even if a sophisticated investor or a stock analyst has superior (but not perfect) forecasting methods, she/he can suffer from a large false positive error. We provide a simple formula for the probability of the rate of False Positives, and analyze its properties.

Suggested Citation

  • Harel, Arie & Harpaz, Giora, 2024. "Why stock analysts may make wrong predictions?," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524004403
    DOI: 10.1016/j.econlet.2024.111956
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    Keywords

    Stock prices forecasting; Bayesian analysis;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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