Noise in Expectations: Evidence from Analyst Forecasts

66 Pages Posted: 6 Mar 2021 Last revised: 24 Jul 2023

See all articles by Tim de Silva

Tim de Silva

Massachusetts Institute of Technology (MIT), Economics, Finance, Accounting (EFA), Students

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 17, 2023

Abstract

Analyst forecasts outperform econometric forecasts in the short run but underperform in the long run. We decompose these differences in forecasting accuracy into analyst information advantage, forecast bias, and forecast noise. We find that noise and bias increase strongly with forecast horizon while analyst information advantage decays rapidly. Noise increase with horizon generates a mechanical reversal in the sign of the Coibion and Gorodnichenko (2015) regression coefficient at longer horizons, independently of over-/underreaction. A parsimonious model with bounded rationality and a noisy cognitive default à la Patton and Timmermann (2010) matches the term structures of noise and bias jointly.

Keywords: subjective expectations, noise, term structure of expectations, forecast bias, forecast noise, bounded rationality, machine learning

JEL Classification: C53, D79, D83, D84, D90, E37, E70, G17, G32, G40, G50, G59

Suggested Citation

de Silva, Tim and Thesmar, David, Noise in Expectations: Evidence from Analyst Forecasts (July 17, 2023). Available at SSRN: https://ssrn.com/abstract=3762348 or http://dx.doi.org/10.2139/ssrn.3762348

Tim De Silva (Contact Author)

Massachusetts Institute of Technology (MIT), Economics, Finance, Accounting (EFA), Students ( email )

Cambridge, MA 02139
United States

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
770
Abstract Views
2,631
Rank
56,043
PlumX Metrics