Accuracy of European Stock Target Prices
REM Working Paper 0115-2020
33 Pages Posted: 4 Aug 2020
Date Written: January 1, 2020
Equity researches are conducted by professionals, who also provide buy/hold/sell recommendations to investors. Nowadays, target prices determined by financial analysts are publicly available to investors, who may decide to use them for investment purposes. Studying the accuracy of such analysts' forecasts is, thus, of paramount importance.
Based upon empirical data on 50 of the biggest (larger capitalisation) European stocks over a 15 year period, from 2004 to 2019 and using a panel data approach, this is the first study looking at overall accuracy in European stock markets.
We find that Bloomberg's 12-month consensus target prices have no predictive over future market prices. Panel results are robust to company fixed effects and sub-period analysis. These results are in line with the (mostly US-based) evidence in the literature.
Extending common practice, we perform a comparative accuracy analysis, comparing the accuracy of target prices with that of simple capitalisations of current prices. It turns out target prices are not better in forecasting, than simple capitalisations. More interestingly, by analysing also the relationship between both measures – target prices and capitalised prices – we find evidence that capitalised prices partially explain how target prices are determined.
Even when considering individual regressions, accuracy is still very low, but varies considerably across stocks.
Keywords: target prices, forecast accuracy, panel data analysis
JEL Classification: C33, G14, G17, G24
Suggested Citation: Suggested Citation