Predictability in Financial Analyst Forecast Errors: Learning or Irrationality?

Posted: 24 May 2003

See all articles by Stanimir Markov

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Ane Tamayo

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2003

Abstract

In this paper, we propose a rational learning-based explanation for the predictability in financial analysts' earnings forecast errors documented in prior literature. In particular, we argue that the serial correlation pattern in analysts' quarterly earnings forecast errors is consistent with an environment in which analysts face parameter uncertainty and learn rationally about the parameters over time. Using simulations, we show that the predictability evidence is more consistent with rational learning than with irrationality (fixation on a seasonal random walk model or some other dogmatic belief).

JEL Classification: G29, M41

Suggested Citation

Markov, Stanimir and Tamayo, Ane Miren, Predictability in Financial Analyst Forecast Errors: Learning or Irrationality? (February 2003). Available at SSRN: https://ssrn.com/abstract=396101 or http://dx.doi.org/10.2139/ssrn.396101

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972 883 5166 (Phone)

Ane Miren Tamayo (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 78494689 (Phone)

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