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Estimating risk-return relations with analysts price targets

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  • Wu, Liuren

Abstract

Asset pricing tests often replace ex ante return expectation with ex post realization. The large deviation between the two drastically weakens the power of these tests. This paper proposes to use analysts consensus price target for a stock as the market expectation of the stock’s future price to directly construct the stock’s expected excess return. Analyzing the expected excess return behavior both over time and across different stocks shows that classic asset pricing theory works much better on ex ante return expectations than on ex post realizations. The analysis also provides new insights on the pricing of common equity risk factors.

Suggested Citation

  • Wu, Liuren, 2018. "Estimating risk-return relations with analysts price targets," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 183-197.
  • Handle: RePEc:eee:jbfina:v:93:y:2018:i:c:p:183-197
    DOI: 10.1016/j.jbankfin.2018.06.010
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    More about this item

    Keywords

    Risk-return relation; Equity risk premium; Analysts price targets;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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