Problem 17E

Buy-side vs. sell-side analysts’ earnings forecasts. Refer to the Financial Analysts Journal (Jul./Aug. 2008) study of financial analysts’ forecast earnings, Exercise 2.86 (p. 86). 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. The mean and standard deviation of forecast errors for both types of analysts are given in the table.

a. Construct a 95% confidence interval for the difference between the mean forecast error of buy-side analysts and the mean forecast error of sell-side analysts.

b. Based on the interval, part a, which type of analysis has the greater mean forecast error? Explain.

c. What assumptions about the underlying populations of forecast errors (if any) are necessary for the validity of the inference, part b?

Solution:

Step 1 of 4:

We have the mean and standard deviation of the Buy-side vs. sell-side analyst’s earnings forecasts.

Buy-Side Analysts Sell-Side Analysts | ||

Sample size |
3,526 |
58,562 |

Mean |
0.85 |
-0.05 |

Standard Deviation |
1.93 |
0.85 |