Do Excessively Volatile Forecasts Impact Investors?

Lundholm, Russell, and Rafael Rogo. "Do excessively volatile forecasts impact investors?." Review of Accounting Studies (2020): 1-36.

62 Pages Posted: 22 Oct 2019 Last revised: 13 Aug 2020

See all articles by Russell J. Lundholm

Russell J. Lundholm

University of British Columbia - Sauder School of Business

Rafael Rogo

University of Cambridge - Judge Business School

Date Written: March 1, 2019

Abstract

There is a logical bound on the time-series variability of analyst forecasts; when variability exceeds this bound it must be caused by something besides statistically rational forecasting. We document occurrences of excessively volatile analyst forecasts and show that they influence investment performance. Comparing trading rules based on forecasts that are excessively volatile and those that are not, we find the returns to investing based on the former are significantly lower, with higher daily volatility, and a lower Sharpe ratio. We also show that returns to trading based on excessively volatile forecasts underperform the most when there is little news arriving and when the news that does arrive is relatively neutral. In this region, it is hardest to argue that analysts are unwittingly overreacting to news; instead, they appear to be intentionally making extreme forecasts to curry favor with management or to differentiate themselves from other analysts.

Keywords: analyst forecasts, excess volatility

JEL Classification: G14, M41

Suggested Citation

Lundholm, Russell J. and Rogo, Rafael, Do Excessively Volatile Forecasts Impact Investors? (March 1, 2019). Lundholm, Russell, and Rafael Rogo. "Do excessively volatile forecasts impact investors?." Review of Accounting Studies (2020): 1-36., Available at SSRN: https://ssrn.com/abstract=3468493 or http://dx.doi.org/10.2139/ssrn.3468493

Russell J. Lundholm (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2
Canada

Rafael Rogo

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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