A Hard Knock Life: Why Analyst Accuracy Falls Short. QWAFAFEW May 25, 2010 Carson Boneck CFA, David Pope CFA. Abstract.
A Hard Knock Life: Why Analyst Accuracy Falls Short
May 25, 2010
Carson Boneck CFA, David Pope CFA
It is a commonly held belief among investors that there is persistence in security analyst's EPS forecast accuracy. Studies by Clement and Brown examine persistence directly and show that, at least in the pre Reg-FD period, there is a measurable amount of analyst accuracy persistence. We confirm this work and extend it to the Post-FD period, to the international markets, and then focus on the market profitability associated with persistence.
Perhaps to many practitioners' (non quants) surprise, we find that persistence is not all that it is believed to be. We show that while persistence is statistically measurable, it has very limited usefulness in predicting the future accurate analysts. Our work shows that using past accurate analysts forecasts leads to somewhat better results than the naive mean, but falls well short of alternative methods. Our work explores the metrics that make forecasts accurate rather than the individuals that make the forecasts themselves.
Think about medicine as an example. Maybe they can find out that coffee drinking has a statistically significant and even important effect on the probability of heart disease, but still not be able to predict whether or not you will suffer from heart disease, regardless of your coffee-drinking habits.
- Allows easy comparisons across stocks, time
- [Abs(Estimate – Actual) – Abs(Average Error) ] / Abs( Avg Error)
- Probably the first thing most investors think about when considering accuracy
- Abs(Estimate – Actual) / Abs(Actual)
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