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Understanding Analysts' Earnings Expectations: Biases, Nonlinearities and Predictability

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  • Timmermann, Allan
  • Aiolfi, Marco
  • Rodriguez, Marius

Abstract

This paper studies the asymmetric behavior of negative and positive values of analysts' earnings revisions and links it to the conservatism principle of accounting. Using a new three-state mixture of log-normals model that accounts for differences in the magnitude and persistence of positive, negative and zero revisions, we find evidence that revisions to analysts' earnings expectations can be predicted using publicly available information such as lagged interest rates and past revisions. We also find that our forecasts of revisions to analysts' earnings estimates help predict the actual earnings figure beyond the information contained in analysts' earnings expectations.

Suggested Citation

  • Timmermann, Allan & Aiolfi, Marco & Rodriguez, Marius, 2010. "Understanding Analysts' Earnings Expectations: Biases, Nonlinearities and Predictability," CEPR Discussion Papers 7656, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7656
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    Cited by:

    1. Baghestani, Hamid & Khallaf, Ashraf, 2012. "Predictions of growth in U.S. corporate profits: Asymmetric vs. symmetric loss," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 222-229.

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    More about this item

    Keywords

    Analysts' earnings forecasts; Mixture model; Predictability of forecast revisions;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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