On the relation between predictable market returns and predictable analyst forecast errors

John Hughes, Jing Liu () and Wei Su
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John Hughes: University of California, Los Angeles
Jing Liu: University of California, Los Angeles
Wei Su: Fuller & Thaler Asset Management, Inc.

Review of Accounting Studies, 2008, vol. 13, issue 2, No 6, 266-291

Abstract: Abstract We investigate the relation between predictable market returns and predictable analyst forecast errors. Perfect correlation between predictable components of forecast errors and abnormal returns would lend credence to the view that pricing anomalies are not merely an artifact of inadequately controlled risk. Our evidence implies an imperfect correlation. Moreover, we find that while the predictable component of abnormal returns is significantly associated with future forecast errors, trading strategies based directly on the predictable component of forecast errors are not profitable. Further implications of our findings are that predictable components of analysts’ forecast errors are robust with respect to loss functions and analysts’ earnings forecasts may significantly diverge from the market expectations.

Keywords: Analyst forecast; Market inefficiency; Stock market anomaly; G12; G14; G29 (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1007/s11142-007-9065-9

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