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Buy-side vs. sell-side analysts’ earnings
Chapter 12, Problem 101E(choose chapter or problem)
Problem 101E
Buy-side vs. sell-side analysts’ earnings forecasts. Referto the Financial Analysts Journal (Jul./Aug. 2008) comparison of earnings forecasts of buy-side and sell-sideanalysts, Exercise 12.90 (p. 721). Recall that the HarvardBusiness School professors used regression to model therelative optimism (y) of the analysts’ 3-month horizonforecasts as a function of x1 = {1 if the analyst workedfor a buy-side firm, 0 if the analyst worked for a sell-sidefirm} and x2 = number of days between forecast andfiscal year-end (i.e., forecast horizon). Consider the complete second-order model
E(y) = β0 + β1x1 + β2x2 + β3x1x2 + β4(x2)2 + β5x1(x2)2
a. What null hypothesis would you test to determine whether the quadratic terms in the model arestatistically useful for predicting relative optimism (y)?
b. Give the complete and reduced models for conducting the test, part a.
c. What null hypothesis would you test to determinewhether the interaction terms in the model are statistically useful for predicting relative optimism(y)?
d. Give the complete and reduced models for conducting the test, part c.
e. What null hypothesis would you test to determinewhether the dummy variable terms in the modelare statistically useful for predicting relativeoptimism (y)?
f. Give the complete and reduced models for conducting the test, part e.
Questions & Answers
QUESTION:
Problem 101E
Buy-side vs. sell-side analysts’ earnings forecasts. Referto the Financial Analysts Journal (Jul./Aug. 2008) comparison of earnings forecasts of buy-side and sell-sideanalysts, Exercise 12.90 (p. 721). Recall that the HarvardBusiness School professors used regression to model therelative optimism (y) of the analysts’ 3-month horizonforecasts as a function of x1 = {1 if the analyst workedfor a buy-side firm, 0 if the analyst worked for a sell-sidefirm} and x2 = number of days between forecast andfiscal year-end (i.e., forecast horizon). Consider the complete second-order model
E(y) = β0 + β1x1 + β2x2 + β3x1x2 + β4(x2)2 + β5x1(x2)2
a. What null hypothesis would you test to determine whether the quadratic terms in the model arestatistically useful for predicting relative optimism (y)?
b. Give the complete and reduced models for conducting the test, part a.
c. What null hypothesis would you test to determinewhether the interaction terms in the model are statistically useful for predicting relative optimism(y)?
d. Give the complete and reduced models for conducting the test, part c.
e. What null hypothesis would you test to determinewhether the dummy variable terms in the modelare statistically useful for predicting relativeoptimism (y)?
f. Give the complete and reduced models for conducting the test, part e.
ANSWER:
Step 1 of 13
(a)
Let y be the relative optimism.
Denote;
