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On the relation between forecast precision and trading profitability of financial analysts

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  • Marinelli, Carlo
  • Weissensteiner, Alex

Abstract

We analyze the relation between earnings forecast accuracy and the expected profitability of financial analysts. Modeling forecast errors with a multivariate normal distribution, a complete characterization of the payoff of each analyst is provided. In particular, closed-form expressions for the probability density function, for the expectation, and, more generally, for moments of all orders are obtained. Our analysis shows that the relationship between forecast precision and trading profitability needs not be monotonic, and that the impact of the correlation between the forecasts on the expected payoff of any single analyst depends on the relative accuracy of his signal.

Suggested Citation

  • Marinelli, Carlo & Weissensteiner, Alex, 2014. "On the relation between forecast precision and trading profitability of financial analysts," Journal of Financial Markets, Elsevier, vol. 20(C), pages 39-60.
    • Handle: RePEc:eee:finmar:v:20:y:2014:i:c:p:39-60
    DOI: 10.1016/j.finmar.2014.03.001
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    2. Weissensteiner, Alex, 2019. "Correlated noise: Why passive investment might improve market efficiency," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 158-172.

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    More about this item

    Keywords

    Financial analyst; Forecast accuracy; Recommendation profitability; Full communication equilibrium;
    All these keywords.

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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