Do excessively volatile forecasts impact investors?

Russell Lundholm () and Rafael Rogo ()
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Russell Lundholm: University of British Columbia
Rafael Rogo: Indiana University

Review of Accounting Studies, 2020, vol. 25, issue 2, No 7, 636-671

Abstract: Abstract There is a logical bound on the time-series variability of analyst forecasts; when variability exceeds this bound it must be caused by something besides statistically rational forecasting. We document occurrences of excessively volatile analyst forecasts and show that they influence investment performance. Comparing trading rules based on forecasts that are excessively volatile and those that are not, we find the returns to investing based on the former are significantly lower, with higher daily volatility, and a lower Sharpe ratio. We also show that returns to trading based on excessively volatile forecasts underperform the most when there is little news arriving and when the news that does arrive is relatively neutral. In this region, it is hardest to argue that analysts are unwittingly overreacting to news; instead, they appear to be intentionally making extreme forecasts to curry favor with management or to differentiate themselves from other analysts.

Keywords: excess volatility; analyst forecasts (search for similar items in EconPapers)
JEL-codes: G12 G14 M49 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11142-019-09522-y

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