A Re-Examination of Analysts’ Differential Target Price Forecasting Ability
40 Pages Posted: 25 Jul 2019
Date Written: July 24, 2019
We challenge the view that persistent differences in accuracy across analysts are proof that analysts differ in their ability to forecast stock prices. We show that these persistent differences in accuracy are driven instead by stock return volatility. Building upon option pricing theory, we construct a measure of forecast quality that controls for stock return volatility and forecast horizon. Contrary to previous studies, which failed to properly account for differences in stock return volatility, our empirical analysis reveals that analysts do not exhibit differences in their ability to forecast stock prices. We show that the accuracy of a target price strongly depends on the stock return volatility and the forecast horizon.
Keywords: Financial analysts, Target prices, Forecasting abilities, Expected accuracy, Persistence of volatility
JEL Classification: G10, G24, G29
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