Loss Function Asymmetry and Forecast Optimality: Evidence from Individual Analysts' Forecasts
We examine the optimality of quarterly earning forecasts issued by individual analysts. When we conduct Ordinary Least Squares (OLS) and Least Absolute Deviations (LAD) analyses, which assume loss function symmetry, we reject the null of forecast optimality at 5% significance level more than 5% of t...
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| Main Authors: | , |
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
2006
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| Online Access: | https://ink.library.smu.edu.sg/soa_research/165 https://ink.library.smu.edu.sg/context/soa_research/article/1164/viewcontent/markovandtan_may09_2006.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | We examine the optimality of quarterly earning forecasts issued by individual analysts. When we conduct Ordinary Least Squares (OLS) and Least Absolute Deviations (LAD) analyses, which assume loss function symmetry, we reject the null of forecast optimality at 5% significance level more than 5% of the time. Relaxing the symmetry assumption reduces the frequency of rejections below 5%. We demonstrate that the cross-sectional variation in the asymmetry parameter of the loss function is related to analyst employment. Overall, our evidence is consistent with the joint hypothesis of asymmetric loss and forecast optimality rather than the alternative of symmetric loss and lack of optimality. |
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