Extracting Forward-Looking Information from Security Prices: A New Approach

Posted: 30 Jan 2008

See all articles by Dan Weiss

Dan Weiss

Tel Aviv University - Coller School of Management

Prasad A. Naik

University of California, Davis

Chih-Ling Tsai

University of California, Davis - Graduate School of Management

Abstract

This paper proposes a new index to extract forward-looking information from security prices and infer market participants' expectations of future earnings. The index, called market-adapted earnings (MAE), utilizes stock returns and fundamental accounting signals to estimate market expectations of future earnings at the firm level. MAE outperforms time-series models (e.g., random walk) in predicting future earnings. Results demonstrate the usefulness of MAE for firms with no analyst following.

Keywords: Single-Index-Model, Market-Adapted Earnings

JEL Classification: G12, C53, M41, G29

Suggested Citation

Weiss, Dan and Naik, Prasad A. and Tsai, Chih-Ling, Extracting Forward-Looking Information from Security Prices: A New Approach. Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1088722

Dan Weiss (Contact Author)

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Prasad A. Naik

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Chih-Ling Tsai

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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