On the relation between predictable market returns and predictable analyst forecast errors

We investigate the relation between predictable market returns and predictable analyst forecast errors. Perfect correlation between predictable components of forecast errors and abnormal returns would lend credence to the view that pricing anomalies are not merely an artifact of inadequately controlled risk. Our evidence implies an imperfect correlation. Moreover, we find that while the predictable component of abnormal returns is significantly associated with future forecast errors, trading strategies based directly on the predictable component of forecast errors are not profitable. Further implications of our findings are that predictable components of analysts’ forecast errors are robust with respect to loss functions and analysts’ earnings forecasts may significantly diverge from the market expectations.     

A note on the extended elementary renewal theorem

Abstract

Let X ₁ ^(µ), X ₂ ^(µ), ... be an infinite sequence of independent and identically distributed random variables defined on the whole real axis and with EX₁ ^(µ) = µ > 0. Put M_n ^(µ) = max (S₀ ^(µ), S₁ ^(µ), ..., S_n ^(µ) , where S_n ^(µ) = X₁ ^(µ) + ... + X_n ^(µ) for n = 1 , 2, ... and S₀ ^(µ) = 0, and define      

On syndicate composition, corporate structure and the certification effect of credit ratings

We assess the relative importance of ratings versus stock exchange listings in reducing information asymmetry using a dataset of syndicated loans to public and private firms in the UK. We find that the certification effect of ratings is largest for private firms and that syndicates are smallest if firms are privately held or unrated. Moreover, we find that the marginal effect of being stock exchange listed is insignificant once these firms are rated. Exploiting the heterogeneity among lenders, we find that especially foreign bank and non-bank investors do not provide capital if firms are unrated. Our paper highlights the information produced by rating agencies as an important mechanism by which ratings improve access to capital. Our results also emphasize the importance of syndicate moral hazard on the supply of uninformed capital: bank-borrower relationships significantly increase the loan share syndicated to investors particularly if firms are not listed and unrated.     

Stakeholder relations and stock returns: On errors in investors' expectations and learning

A significant number of institutional investors publicly state the belief that corporate stakeholder relations are associated with firm value in a manner that the financial market fails to understand. We investigate whether stakeholder information predicted risk-adjusted returns due to errors in investors' expectations and ultimately ceased to do so as attention for such information increased. We build a stakeholder-relations index (SI) for a wide range of U.S. firms over the period 1992–2009 and provide evidence that the SI explained errors in investors' expectations about firms' future earnings. The SI was positively associated with long-term risk-adjusted returns, earnings announcement returns, and errors in analysts' earnings forecasts over the period 1992–2004. However, as attention for stakeholder issues became more widespread, subsequently, these relationships diminished considerably. The results are consistent with the idea that increased investor attention for stakeholder issues eventually eliminates mispricing.     

Quantifying time value errors

Time valuation of cash flows is an essential part of personal financial planning and management. Many financial arrangements are priced according to a cash-flow valuation model. Expected cash flows associated with a stock or bond are discounted at an appropriate risk-adjusted rate in order to determine the fair value of the financial asset. Home mortgage loans are priced according to the discounted value of the future principal and interest cash flows. Yet, despite the importance of the discounted cash flow methodology in pricing assets, computational errors are often made when discount factors are not calculated precisely. This article attempts to quantify the magnitude of the error when the mathematical function for present value is ignored and interpolation is used instead to determine the discount factor.     

The mean errors of the characteristics in logarithmic-normal distributions

Abstract

In his paper ?On the genetic theory of frequency? (Arkiv för Matematik, Astronomi och Fysik, Bd 12, N:o 20, and Meddelande frän Lunds Astronomiska Observatorium N:o 83, 1917), Dr. WIOKSELL has determined the mean of tbe logarithm, l _o and the dispersion, σ_l, assuming tbc logaritbm normally distributed.     

证券分析师预测偏差研究述评

证券分析师的预测是否可以准确地代表市场预期,进而提高市场效率,一直以来都是投资者关注的重点和学术界讨论的热点。现有研究发现,动机驱动和认知偏差等多方面因素可能导致证券分析师的有偏预测。本文从证券分析师预测偏差内涵及其测度差异的界定,导致偏差的动因以及预测偏差对信息有效性的影响等方面对预测偏差的研究脉络和研究进展进行梳理和评述,同时提出了未来的研究方向。     

Inequality and the composition of taxes

This paper analyses the political economics of the composition of taxes. Taxes may be levied on income, or on expenditure, with the median voter pivotal in the theoretical framework analysed. As in Meltzer and Richard (J Polit Econ 89:914–927, 1981), income taxes increase with inequality. Conversely, expenditure taxes first increase and then decrease with increasing inequality. The extent to which taxes are levied on income relative to expenditure unambiguously rises with inequality. In contrast to government size evidence, cross-country data exhibit a robust positive correlation between the extent to which taxes are levied on income relative to expenditure and inequality. Consistent with the theory, this relationship holds most significantly in stronger democracies.     

Experiences with the Personalized System of Instruction (PSI) to teach elementary accounting

The paper examines the use of Personalized System of Instruction (PSI) to teach elementary accounting at a community college. Key criteria to student success include high motivation, being self-disciplined, and having a good reading ability. PSI provides the student with clearly defined learning objectives and immediate feedback on progress. Disadvantages include a high withdrawal rate and lack of student peer interaction.     

Hedging errors with Leland's option model in the presence of transaction costs

Nonzero transaction costs invalidate the Black–Scholes [1973. Journal of Political Economy 81, 637–654] arbitrage argument based on continuous trading. Leland [1985. Journal of Finance 40, 1283–1301] developed a hedging strategy which modifies the Black–Scholes hedging strategy with a volatility adjusted by the length of the rebalance interval and the rate of the proportional transaction cost. Kabanov and Safarian [1997. Finance and Stochastics 1, 239–250] calculated the limiting hedging error of the Leland strategy and pointed out that it is nonzero for the approximate pricing of an European call option, in contradiction to Leland's claim. As a further contribution, we first identify the mathematical flaw in the argument of Leland's claim and then quantify the expected percentage of hedging losses in terms of the hedging frequency and the level of the option strike price.     

Further evidence on the stationarity of betas and errors in their estimates

The objective of this paper is to study the stationarity of beta-coefficients of common stocks through time. Special attention is paid to the influence of errors in the estimated betas on various measures of stationarity. The results indicate that even for small porfolios the true betas (as opposed to estimated betas) are reasonably stable.     

The one-trading-day-ahead forecast errors of intra-day realized volatility

Two volatility forecasting evaluation measures are considered; the squared one-day-ahead forecast error and its standardized version. The mean squared forecast error is the widely accepted evaluation function for the realized volatility forecasting accuracy. Additionally, we explore the forecasting accuracy based on the squared distance of the forecast error standardized with its volatility. The statistical properties of the forecast errors point the standardized version as a more appropriate metric for evaluating volatility forecasts.We highlight the importance of standardizing the forecast errors with their volatility. The predictive accuracy of the models is investigated for the FTSE100, DAX30 and CAC40 European stock indices and the exchange rates of Euro to British Pound, US Dollar and Japanese Yen. Additionally, a trading strategy defined by the standardized forecast errors provides higher returns compared to the strategy based on the simple forecast errors. The exploration of forecast errors is paving the way for rethinking the evaluation of ultra-high frequency realized volatility models.     

The performance of cross-sectional regression tests of the CAPM with non-zero pricing errors

We show that in the presence of non-zero pricing errors, the Fama–MacBeth (FM) cross-sectional regression test is very likely to either reject the Capital Asset Pricing Model (CAPM) when it (almost) holds or accept the model when it grossly fails. We investigate the case when pricing errors are correlated with betas and demonstrate that the test performance depends crucially on the correlation, cross-sectional distribution of betas, and several other parameter values. Even when the CAPM holds exactly (pricing errors are zero) the FM test is equally likely to either reject or accept the model when typical sample sizes are used.     

Relative performance evaluation and peer-performance summarization errors

In tests of the relative performance evaluation (RPE) hypothesis, empiricists rarely aggregate peer performance in the same way as a firm’s board of directors. Framed as a standard errors-in-variables problem, a commonly held view is that such aggregation errors attenuate the regression coefficient on systematic firm performance towards zero, which creates a bias in favor of the strong-form RPE hypothesis. In contrast, we analytically demonstrate that aggregation differences generate more complicated summarization errors, which create a bias against finding support for strong-form RPE (potentially inducing a Type-II error). Using simulation methods, we demonstrate the sensitivity of empirical inferences to the bias by showing how an empiricist can conclude erroneously that boards, on average, do not apply RPE, simply by selecting more, fewer, or different peers than the board does. We also show that when the board does not apply RPE, empiricists will not find support for RPE (that is, precluding a Type-I error).     

Dirty surplus accounting flows and valuation errors

For France, Germany, the U.K. and the U.S. for the period from 1994 to 2001, this study explores empirically the association between valuation errors from a standard empirical application of the residual income valuation model and violations of the clean surplus relationship (dirty surplus accounting flows). Motivated by concern that the effect of dirty surplus accounting on the applicability of accounting-based valuation models might vary across accounting regimes, the study also documents differences across pairs of countries in the relationship between valuation errors and dirty surplus flows. The study finds some weak evidence of predicted relationships between valuation errors and dirty surplus flows in the U.S., but finds little evidence of such relationships elsewhere. There is some limited evidence of cross-country difference in the relationship between valuation errors and dirty surplus flows, mostly involving the U.S.     

A very elementary example of calculation of reserves by means of decomposition of the valuation tables

Abstract

Suppose the folloving problem is in question (Confer my article in Skandinavisk Aktuarietidskrift 1927, p. 17–35).     

Beyond the mechanics of spreadsheets: using design instruction to address spreadsheet errors

Given that the usage and complexity of spreadsheets in the accounting profession are expected to increase, it is more important than ever to ensure that accounting graduates are aware of the dangers of spreadsheet errors and are equipped with design skills to minimize those errors. Although spreadsheet mechanics are prevalent in accounting curricula, less attention has been given to design considerations that can reduce the incidence of spreadsheet errors. The extant literature provides evidence of the most common types of spreadsheet errors and explanations as to why they occur. Using the work of Panko and others, this paper outlines a three-step approach for introducing spreadsheet design practices to novice spreadsheet developers. To facilitate design instruction, this paper provides a summary of foundational readings related to spreadsheet errors as well as specific teaching strategies for addressing the most common spreadsheet errors identified in the literature.