The short term prediction of analysts' forecast error
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.
|Date of creation:||Mar 2012|
|Date of revision:|
|Contact details of provider:|| Web page: http://research.hubrussel.be|
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