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

33 Pages Posted: 3 Sep 2015

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: September 2015

Abstract

This paper contributes to the empirical evidence on the investment horizon salient to trading based on predicting the error in analysts' earnings forecasts. An econometric framework is proposed that accommodates the stylized fact of extreme values in the forecast error series. We find that between 1998 and 2010, the strategy of taking a long (short) position in stocks with the most pessimistic (optimistic) I/B/E/S forecast has an annual risk‐adjusted return of 16.56 per cent before transaction costs. The robust method used to predict this pessimism (optimism) and the one‐week investment horizon are the key drivers of the strategy's profitability.

Keywords: Financial analysts, Forecast error, Short‐term prediction, Trading strategy

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 (September 2015). Accounting & Finance, Vol. 55, Issue 3, pp. 683-715, 2015. Available at SSRN: https://ssrn.com/abstract=2655186 or http://dx.doi.org/10.1111/acfi.12076

Kris Boudt (Contact Author)

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

KU Leuven - FEB@HUBrussel ( email )

Warmoesberg 26
Brussel, 1000
Belgium

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