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Buy-side vs. sell-side analysts’ earnings forecasts. Refer
Chapter 7, Problem 43E(choose chapter or problem)
Problem 43E
Buy-side vs. sell-side analysts’ earnings forecasts. Refer to the Financial Analysts Journal (Jul./Aug. 2008) study of earnings forecasts of buy-side and sell-side analysts, Exercise 2.86 (p. 86). Buy-side analysts differ from sell-side analysts on a variety of factors, including scope of industry coverage, sources of information used, and target audience. Recall that data were collected on 3,526 forecasts made by buy-side analysts and 58,562 forecasts made by sell-side analysts, and the relative absolute forecast error was determined for each. A positive forecast error indicates that the analyst is overestimating earnings, while a negative forecast error implies that the analyst is underestimating earnings. Summary statistics for the forecast errors in the two samples are reproduced in the table below.
a. Conduct a test (at = .01) to determine if the true mean forecast error for buy-side analysts is positive. Use the observed significance level (p-value) of the test to make your decision and state your conclusion in the words of the problem.
b. Conduct a test (at = .01) to determine if the true mean forecast error for sell-side analysts is negative. Use the observed significance level (p-value) of the test to make your decision and state your conclusion in the words of the problem.
Questions & Answers
QUESTION:
Problem 43E
Buy-side vs. sell-side analysts’ earnings forecasts. Refer to the Financial Analysts Journal (Jul./Aug. 2008) study of earnings forecasts of buy-side and sell-side analysts, Exercise 2.86 (p. 86). Buy-side analysts differ from sell-side analysts on a variety of factors, including scope of industry coverage, sources of information used, and target audience. Recall that data were collected on 3,526 forecasts made by buy-side analysts and 58,562 forecasts made by sell-side analysts, and the relative absolute forecast error was determined for each. A positive forecast error indicates that the analyst is overestimating earnings, while a negative forecast error implies that the analyst is underestimating earnings. Summary statistics for the forecast errors in the two samples are reproduced in the table below.
a. Conduct a test (at = .01) to determine if the true mean forecast error for buy-side analysts is positive. Use the observed significance level (p-value) of the test to make your decision and state your conclusion in the words of the problem.
b. Conduct a test (at = .01) to determine if the true mean forecast error for sell-side analysts is negative. Use the observed significance level (p-value) of the test to make your decision and state your conclusion in the words of the problem.
ANSWER:
Solution:
Step 1 of 3:
It is given that in a forecast buy side analysts differ from sell side analysts in many ways.
The summary statistics for the forecast errors of buy side and sell side data are given.
Using this we need to find the required values.
The summary statistics are
Buy side analysis |
Sell side analysis |
|
Mean |
0.85 |
-0.05 |
Standard deviation |
1.93 |
0.85 |
The sample side for buy side forecast data is 3,526 and sample size for sell side forecast is 58,562.