On the Relation between Predictable Market Returns and Predictable Analyst Forecast Errors

41 Pages Posted: 2 Feb 2005

See all articles by John S. Hughes

John S. Hughes

University of California at Los Angeles

Jing Liu

The Cheung Kong Graduate School of Business

Wei Su

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: September 2006

Abstract

We investigate the relation between predictable market returns and predictable analyst forecast errors. Perfect correlation between predictable components of forecast errors and abnormal returns would lend credence to the view that pricing anomalies are not merely an artifact of inadequately controlled risk. Our evidence implies an imperfect correlation. Moreover, we find that while the predictable component of abnormal returns is significantly associated with future forecast errors, trading strategies based directly on the predictable component of forecast errors are not profitable. Further implications of our findings are that predictable components of analysts' forecast errors are robust with respect to loss functions and analysts' earnings forecasts may significantly diverge from the market expectations.

Keywords: Analyst forecasts, information efficiency, rationality, market efficiency

JEL Classification: G14, G12, G29

Suggested Citation

Hughes, John S. and Liu, Jing and Su, Wei, On the Relation between Predictable Market Returns and Predictable Analyst Forecast Errors (September 2006). Available at SSRN: https://ssrn.com/abstract=649665 or http://dx.doi.org/10.2139/ssrn.649665

John S. Hughes

University of California at Los Angeles ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-794-9553 (Phone)
310-267-2193 (Fax)

Jing Liu (Contact Author)

The Cheung Kong Graduate School of Business ( email )

1 East Changan Avenue, Oriental Plaza
E3/3F
Beijing
China

Wei Su

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
727
Abstract Views
3,568
rank
37,540
PlumX Metrics