We analyze the relation between earnings forecast accuracy and the expected profitability of financial analysts. Modeling forecast errors with a multivariate normal distribution, a complete characterization of the payoff of each analyst is provided. In particular, closed-form expressions for the probability density function, for the expectation, and, more generally, for moments of all orders are obtained. Our analysis shows that the relationship between forecast precision and trading profitability needs not be monotonic, and that the impact of the correlation between the forecasts on the expected payoff of any single analyst depends on the relative accuracy of his signal.
Journal of Financial Markets, 2014, Vol 20, p. 39-60
Financial analyst; Forecast accuracy; Recommendation profitability; Full communication equilibrium