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The short term prediction of analysts' forecast error

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Author Info

  • Boudt, Kris

    ()
    (KULeuven, Lessius University College, V.U.University of Amsterdam)

  • De Goeij, Peter

    (Tilburg University)

  • Thewissen, James

    ()
    (KULeuven, Lessius University College, HUBrussel)

  • Van Campenhout, Geert

    ()
    (Hogeschool-Universiteit Brussel (HUB), KULeuven)

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    Abstract

    We examine the profitability of implementing a short term trading strategy based on predicting the error in analysts' earnings per share forecasts using publicly available information. In the 1998-2010 I/B/E/S data, the strategy of taking a long (short) position in stocks with the most pessimistic (optimistic) consensus forecast and closing the position on the rst post announcement day has an annual gross abnormal return of 16.56%, after correcting for market risk, size, book-to-market and price momentum effects. A key insight is that the profitability of the trading strategy stems from using robust forecasting methods and from focusing on the stocks with the most extreme predicted forecast errors. The trading strategies using least squares regression and/or focusing merely on the sign of the forecast error are not profitable.

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    File URL: https://lirias.hubrussel.be/bitstream/123456789/6199/1/12HRP16.pdf
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    Bibliographic Info

    Paper provided by Hogeschool-Universiteit Brussel, Faculteit Economie en Management in its series Working Papers with number 2012/16.

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    Length: 37 page
    Date of creation: Mar 2012
    Date of revision:
    Handle: RePEc:hub:wpecon:201216

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    Web page: http://research.hubrussel.be
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    Related research

    Keywords: Financial analysts; Forecast error; Short term prediction; Trading strategy;

    This paper has been announced in the following NEP Reports:

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