Extracting Forward-Looking Information from Security Prices: A New Approach
Posted: 30 Jan 2008
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
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