Review of Accounting Studies

, Volume 13, Issue 2, pp 266–291

On the relation between predictable market returns and predictable analyst forecast errors

Article

DOI: 10.1007/s11142-007-9065-9

Cite this article as:
Hughes, J., Liu, J. & Su, W. Rev Acc Stud (2008) 13: 266. doi:10.1007/s11142-007-9065-9

Abstract

We investigate the relation between predictable market returns and predictable analyst forecast errors. Perfect correlation between predictable components of forecast errors and abnormal returns would lend credence to the view that pricing anomalies are not merely an artifact of inadequately controlled risk. Our evidence implies an imperfect correlation. Moreover, we find that while the predictable component of abnormal returns is significantly associated with future forecast errors, trading strategies based directly on the predictable component of forecast errors are not profitable. Further implications of our findings are that predictable components of analysts’ forecast errors are robust with respect to loss functions and analysts’ earnings forecasts may significantly diverge from the market expectations.

Keywords

Analyst forecast Market inefficiency Stock market anomaly 

JEL Classifications

G12 G14 G29 

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Anderson School of ManagementUniversity of California, Los AngelesLos AngelesUSA
  2. 2.Fuller & Thaler Asset Management, Inc.San MateoUSA