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Stock Return Predictability and the Dispersion in Earnings Forecasts

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  • Cheolbeom Park

    (National University of Singapore)

Abstract

Using monthly data for earnings forecasts by market analysts, this paper shows that the dispersion in forecasts has particularly strong predictive power for future aggregate stock returns at intermediate horizons. The results are robust (1) regardless of whether Newey-West or Hodrick corrected t-statistics are used, (2) when other forecasting or macroeconomic variables are included, (3) when different scaling variables are used for the dispersion measure, and (4) after correcting for finite sample biases. Furthermore, additional results suggest that the dispersion in analysts' forecasts can be interpreted as a measure of the differences in investors' expectations rather than the risk.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 6 (November)
Pages: 2351-2376

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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2351-2376

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Yu, Jialin, 2011. "Disagreement and return predictability of stock portfolios," Journal of Financial Economics, Elsevier, vol. 99(1), pages 162-183, January.
  2. Bruce I. Carlin & Francis A. Longstaff & Kyle Matoba, 2012. "Disagreement and Asset Prices," NBER Working Papers 18619, National Bureau of Economic Research, Inc.
  3. Jiang, Danling, 2013. "The second moment matters! Cross-sectional dispersion of firm valuations and expected returns," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3974-3992.
  4. Kim, Jun Sik & Ryu, Doojin & Seo, Sung Won, 2014. "Investor sentiment and return predictability of disagreement," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 166-178.
  5. Lee, Hei Wai & Valero, Magali, 2010. "Cross-listing effect on information environment of foreign firms: ADR type and country characteristics," Journal of Multinational Financial Management, Elsevier, vol. 20(4-5), pages 178-196, December.
  6. Mordecai Kurz & Maurizio Motolese, 2007. "Diverse Beliefs and Time Variability of Risk Premia," Discussion Papers 06-044, Stanford Institute for Economic Policy Research.
  7. Zhang, Yuzhao, 2014. "Contrarian flows, consumption and expected stock returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 101-111.
  8. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.

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