Aggregate Analyst Forecast Errors, Stock Market Liquidity, and the Economy

62 Pages Posted: 16 Feb 2018

See all articles by Ji-Chai Lin

Ji-Chai Lin

Hong Kong PolyU

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting

Ping-Wen Sun

Minjiang University - Newhuadu Business School

Date Written: December 5, 2017

Abstract

We examine aggregate analyst forecast errors (AAFE) and find a systematic component, which is predictable using lagged stock market returns and macroeconomic variables. The evidence suggests that analysts do not fully take into account macroeconomic influences on individual firms’ earnings in their forecasts, and that systematic biases in market expectations exist. Since informed investors may exploit over-optimistic (over-pessimistic) analyst earnings forecasts in their sells (buys), their trading affects stock prices, which induces uninformed investors to gradually revise their expectations and leave (enter) the market. As the number of uninformed investors decreases (increases), stock market liquidity deteriorates (improves). Based on this reasoning, we show that – predictable AAFE is a driving force of time-varying stock market liquidity – and also an important channel through which stock market liquidity incorporates macroeconomic information.

Keywords: aggregate analyst earnings forecast errors, business cycle, stock market liquidity

JEL Classification: E32, G12, G17

Suggested Citation

Lin, Ji-Chai and Reichelt, Kenneth John and Sun, Ping-Wen, Aggregate Analyst Forecast Errors, Stock Market Liquidity, and the Economy (December 5, 2017). Available at SSRN: https://ssrn.com/abstract=3118200 or http://dx.doi.org/10.2139/ssrn.3118200

Ji-Chai Lin

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting ( email )

2821 Business Education Complex
Baton Rouge, LA 70803
United States
225-578-6233 (Phone)

Ping-Wen Sun (Contact Author)

Minjiang University - Newhuadu Business School ( email )

Fujian
China

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