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The impact of analyst forecast errors on fundamental indexation: the Australian evidence

Author

Listed:
  • Lorenzo Casavecchia

    (University of Technology Sydney, UTS Business School)

  • Gerhard Hambusch

    (University of Technology Sydney, UTS Business School)

  • Justin Hitchen

    (University of Technology Sydney, UTS Business School)

Abstract

Evidence from many developed markets suggests that fundamental indices outperform capitalisation-weighted indices. Existing studies suspect a story of market mispricing, yet a mechanism has not been identified. Using Australian data, we study the relation between analyst forecast errors and the performance of various fundamental indices. We find that fundamental indices contain a relatively higher exposure to stocks with low analyst long-term growth forecasts. Valuations for these stocks are ex ante overly pessimistic and drive the statistical significance of alphas produced by fundamental indexation. We show how hedging against analyst forecast errors can generate additional alpha for investors using fundamental indexation.

Suggested Citation

  • Lorenzo Casavecchia & Gerhard Hambusch & Justin Hitchen, 2022. "The impact of analyst forecast errors on fundamental indexation: the Australian evidence," Journal of Asset Management, Palgrave Macmillan, vol. 23(5), pages 400-418, September.
    • Handle: RePEc:pal:assmgt:v:23:y:2022:i:5:d:10.1057_s41260-022-00276-y
    DOI: 10.1057/s41260-022-00276-y
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    More about this item

    Keywords

    Fundamental indexation; Smart beta; Cap-weighted index; Analyst forecast errors; French Fama alpha;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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