Analysts' Forecast Error: A Robust Prediction Model and its Short Term Trading Profitability

Accounting and Finance, 55, 683-715, 2012

55 Pages Posted: 18 Mar 2012 Last revised: 21 Nov 2017

See all articles by Kris Boudt

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Peter de Goeij

Tilburg University

James Thewissen

KU Leuven - Faculty of Business and Economics (FEB)

Geert Van Campenhout

KU Leuven - FEB@HUBrussel

Date Written: March 16, 2012

Abstract

We examine the profitability of implementing a short term trading strategy based on predicting the error in analysts' earnings per share forecasts using publicly available information. Since large earnings surprises may lead to extreme values in the forecast error series that disrupt their smooth autoregressive dynamics, we propose to use robust fixed effect panel estimation methods as an alternative to panel least squares or the pooled least absolute deviations estimator. For the I/B/E/S data from 1998 to 2010, we show that the strategy of taking a long (short) position in stocks with the most pessimistic (optimistic) consensus forecast and closing the position on the first post announcement day has an annual gross abnormal return of 16.56%, after correcting for market risk, size, book-to-market and price momentum effects. A key insight is that the profitability of the trading strategy stems from using robust forecasting methods.

Keywords: financial analysts, forecast error, short term prediction, trading strategy

JEL Classification: G14, G11, C18, C53, M41

Suggested Citation

Boudt, Kris and de Goeij, Peter and Thewissen, James and Van Campenhout, Geert, Analysts' Forecast Error: A Robust Prediction Model and its Short Term Trading Profitability (March 16, 2012). Accounting and Finance, 55, 683-715, 2012. Available at SSRN: https://ssrn.com/abstract=2025048 or http://dx.doi.org/10.2139/ssrn.2025048

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Peter De Goeij

Tilburg University ( email )

P.O. Box 90153
Room I607
Tilburg, Noord-Brabant 5000 LE
Netherlands
+31134662083 (Phone)

James Thewissen

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Geert Van Campenhout (Contact Author)

KU Leuven - FEB@HUBrussel ( email )

Warmoesberg 26
Brussel, 1000
Belgium

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