On the Weighting of Individual Analyst Forecasts in the Consensus

41 Pages Posted: 19 Jul 2007

See all articles by Marty Butler

Marty Butler

AlixPartners LLP

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Arthur G. Kraft

City University London - Cass Business School

Date Written: July 18, 2007

Abstract

A consensus forecast commonly represents a simple average, or equal weighting, of individual analyst forecasts. We demonstrate, however, that an equal-weight consensus generally does not aggregate information in individual analyst forecasts efficiently and that an aggregation scheme informed by forecast and analyst attributes results in a more accurate consensus forecast. For example, in the case of forecasts issued in the sixty days immediately preceding an earnings announcement, the mean squared error ("MSE") of an informed consensus forecast whose component weights are based on forecast age, broker size, and analyst experience is significantly less than that of a naive consensus. In this case, MSE-improvement ranges from three to fifteen percent, respectively, as the number of forecasts in the consensus varies from four to twenty.

Keywords: Analyst forecast accuracy, analyst characteristics, forecast combinations

JEL Classification: D81, G10, G29

Suggested Citation

Butler, Marty B. and Markov, Stanimir and Kraft, Arthur Gerald, On the Weighting of Individual Analyst Forecasts in the Consensus (July 18, 2007). Available at SSRN: https://ssrn.com/abstract=1001523 or http://dx.doi.org/10.2139/ssrn.1001523

Marty B. Butler

AlixPartners LLP ( email )

2101 Cedar Springs Rd, Ste 1100
Dallas, TX 75201
United States
214-810-6622 (Phone)

Stanimir Markov (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972 883 5166 (Phone)

Arthur Gerald Kraft

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain

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