Are aggregate corporate earnings forecasts unbiased and efficient?

Deschamps, Bruno
November 2015
Review of Quantitative Finance & Accounting;Nov2015, Vol. 45 Issue 4, p803
Academic Journal
In this article, we analyze the properties of professional aggregate corporate earnings forecasts with regards to accuracy, unbiasedness, and efficiency. Using a large panel of forecasts for the years 1992-2011, we find that forecast errors are in general large, and the magnitude of forecast errors varies substantially across forecasters. Forecasts are however directionally accurate, especially during periods of slowdown. We find evidence of an underprediction bias, as forecasters failed to predict the strong growth of corporate earnings that took place over the past two decades. Forecasts biases and forecast errors are particularly large during periods of economic instability such as recession years, suggesting that biases originate in forecasters' slow adjustment to structural shocks. Finally, we reject forecast efficiency, and find evidence of overreaction to new information, as evidenced by the negative autocorrelation of forecast revisions. Forecasters overreact equally strongly to good and bad aggregate earnings news, resulting in excessive forecast volatility.


Related Articles

  • Another Look at Mutual Fund Tournaments. Busse, Jeffrey A. // Journal of Financial & Quantitative Analysis;Mar2001, Vol. 36 Issue 1, p53 

    Daily returns are used to examine how mutual funds actively alter the risk of their portfolios in response to past performance. Compared to monthly data, daily returns produce much more efficient estimates of fund volatility, which give vastly different inferences about the behavior of fund...

  • Stock Market Spread Trading: Argentina and Brazil Stock Indexes. Batten, Jonathan A.; Szilagyi, Peter G.; Wong, Michael C. S. // Emerging Markets Finance & Trade;May2014 Supplement, Vol. 50, p61 

    Brazil has the largest stock market in South America; Argentina has one of the smallest. We investigate the spread relationship between these two markets, measured as the ratio of Brazil's Bovespa index to Argentina's Merval index. Using rescaled range analysis, we identify the presence of a...

  • Volume- and size-related lead�lag effects in stock returns and volatility: An empirical investigation of the Warsaw Stock Exchange. Gebka, Bartosz // International Review of Financial Analysis;2008, Vol. 17 Issue 1, p134 

    Abstract: We analyze the autocorrelation structure of returns and volatility of stocks listed in the single auction system on the Warsaw Stock Exchange during the period January 1996 � October 2000. First, we find that size- and volume-related cross-autocorrelation in portfolio returns...

  • Price limits on a call auction market: Evidence from the Warsaw Stock Exchange. Henke, Harald; Voronkova, Svitlana // International Review of Economics & Finance;2005, Vol. 14 Issue 4, p439 

    Abstract: We empirically investigate the impact of price limits on volatility and autocorrelation in the call auction segment of the Warsaw Stock Exchange (WSE). Because call auctions offer time-out periods to investors, we do not expect price limits to counter overreaction and panic in this...

  • Stylized Facts of Financial Time Series and Three Popular Models of Volatility. Malmsten, Hans; Teräsvirta, Timo // European Journal of Pure & Applied Mathematics;2010, Vol. 3 Issue 3, p443 

    Properties of three well-known and frequently applied first-order models for modelling and forecasting volatility in daily or weekly financial series such as stock and exchange rate returns are considered. These are the standard Generalized Autoregressive Conditional Heteroskedasticity (GARCH),...

  • B&B downgrades interim profit forecast.  // Money Management;8/21/2008, Vol. 22 Issue 31, p8 

    The article reports on the profit forecast of Babcock & Brown Ltd. for 2008 in Australia. Babcock predicts that its after tax profit will range from 25-40 percent, below the $250 million interim result in 2007. Chief executive Phil Green expresses that decline of forecast was influenced by the...

  • The future too cloudy for HFA. Rich, Sara // Money Management;8/28/2008, Vol. 22 Issue 32, p5 

    The article focuses on the report announced by global absolute return fund manager HFA Holdings Ltd. regarding their full year net profit after tax of $35.2 million. However, the company refused to forecast the data for 2009 due to the current volatile economic climate. Despite the volatility...

  • Lead indicator models and UK analysts' earnings forecasts. Hussain, Simon // Accounting & Business Research (Wolters Kluwer UK);Autumn98, Vol. 28 Issue 4, p271 

    This study examines the predictive ability of models which adjust random walk forecasts of corporate earnings, to incorporate past changes in economic lead indicators. The results suggest that changes in the broad money supply measure M4 contain predictive ability, beyond equivalent changes in...

  • Evidence of an asymmetry in the relationship between volatility and autocorrelation McKenzie, Michael D.; Kim, Suk-Joong // International Review of Financial Analysis;2007, Vol. 16 Issue 1, p22 

    Abstract: This paper focuses on the general determinants of autocorrelation and the relationship between autocorrelation and volatility in particular. Using UK stock market index and individual stock price data, a multivariate generalized autoregressive conditional heteroskedasticity (M-GARCH)...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics