On the Relation between Forecast Precision and Trading Profitability of Financial Analysts

26 Pages Posted: 31 Jan 2013 Last revised: 1 Jul 2017

See all articles by Carlo Marinelli

Carlo Marinelli

University of Bonn - Institut fuer Angewandte Mathematik

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: May 16, 2013

Abstract

We analyze the relation between earning forecast accuracy and expected profitability of financial analysts. Modeling forecast errors with a multivariate Gaussian distribution, a complete characterization of the payoff of each analyst is provided. In particular, closed-form expressions for the probability density function, for the expectation, and, more generally, for moments of all orders are obtained. Our analysis shows that the relationship between forecast precision and trading profitability need not to be monotonic, and that, for any analyst, the impact on his expected payoff of the correlation between his forecasts and those of the other market participants depends on the accuracy of his signals. Furthermore, our model accommodates a unique full-communication equilibrium.

Keywords: financial analyst, forecast accuracy, recommendation profitability, full communication equilibrium

JEL Classification: M4, G14

Suggested Citation

Marinelli, Carlo and Weissensteiner, Alex, On the Relation between Forecast Precision and Trading Profitability of Financial Analysts (May 16, 2013). Journal of Financial Markets, 2014, 20, 39-60. Available at SSRN: https://ssrn.com/abstract=2208998 or http://dx.doi.org/10.2139/ssrn.2208998

Carlo Marinelli

University of Bonn - Institut fuer Angewandte Mathematik ( email )

Wegelerstr. 6
53115 Bonn
Germany

Alex Weissensteiner (Contact Author)

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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