Earnings forecasts and idiosyncratic volatilities

Lawrence Kryzanowski and Sana Mohsni

International Review of Financial Analysis, 2015, vol. 41, issue C, 107-123

Abstract: We test the theoretical relation between idiosyncratic return volatilities and the volatilities of cash-flow news based on the expected returns on equity (ROE) for CRSP stocks over the period 1977–2008. Consistent with economic intuition, we find that using analyst forecasts of earnings is superior to using realized earnings to proxy for market expectations about future cash flow news. Our findings are consistent with a market where stock return volatilities are positively and asymmetrically related to changes in the volatilities of expectations for a fundamental driver of cash flow news (ROE). Our findings are robust after correcting for forecast biases, various fundamental variables, newly-listed and mature firms, and periods with and without earnings announcements.

Keywords: Idiosyncratic volatilities; Earnings forecasts; I/B/E/S; Cash-flow news; Fundamental variables (search for similar items in EconPapers)
JEL-codes: C12 C21 C22 C23 G12 G14 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:41:y:2015:i:c:p:107-123

DOI: 10.1016/j.irfa.2015.06.001

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