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Understanding Analysts' Earnings Expectations - Rady School of ...

Understanding Analysts' Earnings Expectations - Rady School of ...

Understanding Analysts' Earnings Expectations - Rady School of

Understanding Analysts’ Earnings Expectations: Biases,Nonlinearities and Predictability ∗Marco Aiolfi †Platinum Grove Asset ManagementMarius Rodriguez ‡Federal Reserve BoardAllan TimmermannUCSDMay 24, 2009AbstractFinancial analysts’ earnings forecasts are a key determinant of stock prices and understandinghow these forecasts evolve over time is important. This paper studies theasymmetric behavior of negative and positive values of analysts’ earnings revisions andlinks it to the conservatism principle of accounting. Using a new three-state mixtureof log-normals model that accounts for differences in the magnitude and persistence ofpositive, negative and zero revisions, we find evidence that revisions to analysts’ earningsexpectations−which under conventional assumptions should follow a martingaledifference process−can be predicted using publicly available information such as laggedinterest rates and past revisions. We also find that our forecasts of revisions to analysts’earnings estimate help predict the actual earnings figure beyond the informationcontained in analysts’ earnings expectations.∗ We are grateful to the editor, Rene Garcia, an associate editor and an anonymous referee for commentson an earlier draft.Participants at the 2008 SoFie conference at New York University provided helpfulcomments on the paper.† The views, thoughts and opinions expressed in this paper are those of the authors in their individualcapacity and should not in any way be attributed to Platinum Grove Asset Management LP or to MarcoAiolfi as a representative officer, or employee of Platinum Grove Asset Management LP.‡ The opinions herein are our own, and do not reflect the views of the Board of Governors of the FederalReserve System. Corresponding Author: marius.d.rodriguez@frb.gov

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