Directional accuracy tests of Chinese renminbi forecasts

This study investigates the directional accuracy of Chinese renminbi exchange rate forecasts by professional forecasters. The forecast with a horizon of one year is useful, whereas the forecasts with forecast horizons of one and three months are not useful in predicting the direction of the exchange rate change. The results for the long-term forecasts suggest that forecasters believe that the government maintains its foreign exchange rate policy of renminbi appreciation. In contrast, short-term forecasts show consistent evidence of exchange rate unpredictability.     

An Empirical Examination of the Divergence between Managers’ and Analysts’ Earnings Forecasts

We study circumstances when analysts’ forecasts diverge from managers’ forecasts after management guidance, and the consequences of this divergence for investors and analysts. Our results show that investors’ return response to earnings surprises based on analyst forecasts is significantly weaker when analyst and management forecasts diverge, and that this attenuating effect is stronger when the management forecast is more credible. When the divergent management forecast is more accurate than the analyst consensus forecast, the subsequent‐quarter analyst consensus forecast is significantly more accurate than that of the current quarter, and exhibits less serial correlation. Overall, our findings suggest that, when analyst and management forecasts diverge, investors find the two sources to contain complementary information, and analysts learn to improve their subsequent forecasts.     

A Re-Examination of Financial Analysts' Differential Earnings Forecast Accuracy*

Abstract. This research re-examines whether there are differences in the forecast accuracy of financial analysts through a comparison of their annual earnings per share forecasts. The comparison of analyst forecast accuracy is made on both an ex post (within sample) and an ex ante (out of sample) basis. Early examinations of this issue by Richards (1976), Brown and Rozeff (1980), O'Brien (1987), Coggin and Hunter (1989), O'Brien (1990), and Butler and Lang (1991) were ex post and suggest the absence of analysts who can provide relatively more accurate forecasts over multiple years. Contrary to the results of prior research and consistent with the belief in the popular press, we document that differences do exist in financial analysts' ex post forecast accuracy. We show that the previous studies failed to find differences in forecast accuracy due to inadequate (or no) control for differences in the recency of forecasts issued by the analysts. It has been well documented in the literature that forecast recency is positively related to forecast accuracy (Crichfield, Dyckman, and Lakonishok 1978; O'Brien 1988; Brown 1991). Thus, failure to control for forecast recency may reduce the power of tests, making it difficult to reject the null hypothesis of no differences in forecast accuracy even if they do exist. In our analysis, we control for the differences in recency of analysts' forecasts using two different approaches. First, we use an estimated generalized least squares estimation procedure that captures the recency-induced effects in the residuals of the model. Second, we use a matched-pair design whereby we measure the relative forecast accuracy of an analyst by comparing his/her forecast error to the forecast error of another randomly selected analyst making forecasts for the same firm in the same year on or around the same date. Using both approaches, we find that differential forecast accuracy does exist amongst analysts, especially in samples with minimum forecast horizons of five and 60 trading days. We show that these differences are not attributable to differences in the forecast issuance frequency of the financial analysts. In sum, after controlling for firm, year, forecast recency, and forecast issuance frequency of individual analysts, the analyst effect persists. To validate our findings, we examine whether the differences in the forecast accuracy of financial analysts persist in holdout periods. Analysts were assigned a “superior” (“inferior”) status for a firm-year in the estimation sample using percentile rankings on the distribution of absolute forecast errors for that firm-year. We use estimation samples of one- to four-year duration, and consider two different definitions of analyst forecast superiority. Analysts were classified as firm-specific “superior” if they maintained a “superior” status in every year of the estimation sample. Furthermore, they were classified as industry-specific “superior” if they were deemed firm-specific “superior” with respect to at least two firms and firm-specific “inferior” with respect to no firm in that industry. Using either definition, we find that analysts classified as “superior” in estimation samples generally remain superior in holdout periods. In contrast, we find that analysts identified as “inferior” in estimation samples do not remain inferior in holdout periods. Our results suggest that some analysts' earnings forecasts should be weighted higher than others when formulating composite earnings expectations. This suggestion is predicated on the assumption that capital markets distinguish between analysts who are ex ante superior, and that they utilize this information when formulating stock prices. Our study provides an ex ante framework for identifying those analysts who appear to be superior. When constructing weighted forecasts, a one-year estimation period should be used because we obtain the strongest results of persistence in this case.     

Who Herds? Who Doesn't? Estimates of Analysts’ Herding Propensity in Forecasting Earnings

We develop parametric estimates of the imitation‐driven herding propensity of analysts and their earnings forecasts. By invoking rational expectations, we solve an explicit analyst optimization problem and estimate herding propensity using two measures: First, we estimate analysts’ posterior beliefs using actual earnings plus a realization drawn from a mean‐zero normal distribution. Second, we estimate herding propensity without seeding a random error, and allow for nonorthogonal information signals. In doing so, we avoid using the analyst's prior forecast as the proxy for his posterior beliefs, which is a traditional criticism in the literature. We find that more than 60 percent of analysts herd toward the prevailing consensus, and herding propensity is associated with various economic factors. We also validate our herding propensity measure by confirming its predictive power in explaining the cross‐sectional variation in analysts’ out‐of‐sample herding behavior and forecast accuracy. Finally, we find that forecasts adjusted for analysts’ herding propensity are less biased than the raw forecasts. This adjustment formula can help researchers and investors obtain better proxies for analysts’ unbiased earnings forecasts.     

ECONOMIC REFORM WHEN THE CONSTITUTION MATTERS: INDONESIA'S CONSTITUTIONAL COURT AND ARTICLE 33

Article 33 of Indonesia's Constitution requires the state to ‘control’ important branches of production and natural resources. The meaning of ‘control’ has been a matter of significant debate since Indonesia's independence: does it require the state to manage directly, or is regulation enough? The government has recently sought to break down government monopolies and attract private investment in key sectors. To this end it has enacted a raft of new statutes, but they have been challenged in Indonesia's new Constitutional Court. The Court has opted for the ‘direct manage ment’ interpretation of article 33, striking down statutes that implicitly interpret it as requiring government regulation only. This paper discusses these decisions and, more broadly, problems arising from judicial intervention in economic policy formation. It also considers how the government has sought to circumvent the decisions, and the possible consequences of state non-compliance for the Court's future.     

Investors' Misweighting of Firm-Level Information and the Market's Expectations of Earnings

Prior studies use fundamental earnings forecasts to proxy for the market's expectations of earnings because analyst forecasts are biased and are available for only a subset of firms. We find that as a proxy for market expectations, fundamental forecasts contain systematic measurement errors analogous to those in analysts' biased forecasts. Therefore, these forecasts are not representative of investors' beliefs. The systematic measurement errors from using fundamental forecasts to proxy for market expectations occur because investors misweight the information in many firm-level variables when estimating future earnings, but fundamental forecasts are formed using the historically efficient weights on firm-level variables. Thus, we develop an alternative ex ante proxy for the market's expectations of future earnings (“the implied market forecast”) using the historical (and inefficient) weights, as reflected in stock returns, that the market places on firm-level variables. A trading strategy based on the implied market forecast error, which is measured as the difference between the implied market forecast and the fundamental forecast, generates excess returns of approximately 9 percent per year. These returns cannot be explained by investors' reliance on analysts' biased forecasts. Overall, our results reveal that market expectations differ from both fundamental forecasts and analysts' forecasts.     

The implications of monetary expansion in China for the US dollar

We examine the influence of rapid growth in China's money supply on the US dollar within a framework of monetary models of exchange rates. We develop out-of-sample forecasts of the US dollar exchange rate using US and global data on price level, output, and interest rates, and money supply data for the US, China, and the rest of the world for the period 1996–2013. Monetary model forecasts significantly outperform a random walk forecast in terms of mean squared forecast error in the long run. A monetary error correction model with sticky prices performs best. Rolling sample analysis indicates changes over time in the influence of Chinese money supply in forecasting the US dollar. The expectation is that rapid money growth in China would increase the demand for dollars thus raising the value of the dollar, yet our forecasts are to the contrary for the mid 2000s. This is consistent with anticipation of renminbi appreciation under China’s managed exchange rate, which made holding renminbi more attractive. With the break from a dollar peg in 2005 and subsequent currency appreciation, the distortion was alleviated and the forecast direction for the dollar became as expected.     

分析师的现金流预测有用吗——基于信息供给的视角

文章考察了证券分析师现金流预测行为对盈余预测质量的影响。研究发现,相对于没有现金流预测的公司,有预测的公司其盈余预测质量更高;现金流预测的次数越多,盈余预测质量越高;以上关系在盈余波动大、经营活动现金流波动大的公司更加明显。这说明我国分析师提供现金流预测信息的确有用,能够帮助分析师改善其盈余预测质量。文章的发现具有重要的实践价值,能够帮助投资者了解分析师现金流预测对盈余预测的影响,从而更有效地利用证券分析师报告进行决策。     

An analysis of RSQE forecasts: 1971–1992

The purpose of this paper is to evaluate the accuracy of ex ante econometric model forecasts of four key macroeconomic variables: real GNP growth, the rate of price inflation measured by the GNP deflator, the civilian unemployment rate, and the Treasury Bill rate. Annual forecasts produced by the Research Seminar in Quantitative Economics (RSQE) based on the Michigan Quarterly Econometric Model of the U.S. Economy are compared with quasi ex ante forecasts from a four-variable vector autoregressive (VAR) model. Statistical tests of the equality of forecast error variances as well as univariate and multivariate forecast encompassing-type tests are conducted. The forecast error variance comparisons indicate that for three of the four variables the RSQE forecasts are more accurate than the VAR forecasts and for one of the variables (real GNP growth) only slightly less accurate. The forecast encompassing-type tests indicate that the RSQE forecasts contain information not contained in the VAR forecasts and, conversely, that VAR forecasts contain information not included in the RSQE forecasts. The scope for improving RSQE forecasts by combining them with VAR forecasts is rather limited, however.     

A time‐series analysis of Zimbabwe's corn sales to the Grain Marketing Board

This article considers methods of cointegration testing to construct a model of Zimbabwe ‘s corn sector. Corn production, sales of corn to the government, the price of corn, and price of beef are linked together in one long‐run equilibrium (cointegrating) relation. Only the price of beef is not weakly exogenous to perturbations in this relation. That is to say, when these variables are out of long‐run equilibrium, it is through subsequent changes in the price of beef that equilibrium is restored. The other variables do not respond to a long‐run disequilibrium. Short‐run forecasts from this model are compared with expert opinion forecasts made by the government's marketing board. Possibilities for improvement in long‐run forecasting and planning are discussed.     

Bayesian Vector Autoregression Forecasts of Chinese Steel Consumption

China consumed 116 million tonnes of steel in 2000, making it the largest consumer of steel in the world. China differs fundamentally from other countries at similar levels of economic development in that the secondary sector, the traditional consumer of steel products, already accounts for a significant proportion of domestic production. This suggests that little of any future growth in China's steel consumption will result from further rises in the ‘steel intensity’ of domestic production. Rather, growth in GDP will be the driving force behind future growth in steel consumption. This paper uses a macroeconomic Bayesian vector autoregression model to forecast steel consumption in China to 2010. This technique uses historical correlations among the variables in a system of equations and Bayesian priors on the estimated parameters, to introduce more flexibility into the forecasting process and align the models closer in nature to structural commodity market models. The forecasts suggest that steel consumption in China will rise from 116 million tonnes in 2000 to around 182 million tonnes in 2010.     

Long-Term Forecasts of Regional Development: Analysis of Results and the Problem of Development

The article presents the results of an analysis of regional development forecasts assumed by the government authorities and developed by scientific organizations. It is shown that the hypotheses included in the forecast scenarios, as to the prospective dynamics and changes in regional production structure, have not been implemented. The problems of the long-term forecasting of regional development, their possibilities, and directions of improvement, and the methods used when preparing the forecasts have been studied.     

Evaluating CPB’s Forecasts

This paper analyzes forecasts, for ten key annually observed economic variables for the Netherlands, created by the Netherlands Bureau for Economic Policy Analysis (CPB) for 1971–2007. These CPB forecasts are all manually modified model forecasts, where the model is a (very) large multi-equation macro model. The CPB forecasts are held against real-time forecasts obtained from simple autoregressive time series models, and for seven of the ten cases, CPB’s forecasts are significantly more accurate. Combining CPB’s forecasts with the real time autoregressive forecasts shows that four of the ten combined forecasts are significantly better than CPB’s forecasts, and seven of the ten are better than the time series forecasts. This suggests that CPB’s manual adjustment efforts could perhaps be directed to modifying simple model forecasts and not the forecasts from the own large macro model.     

Singapore's recurrent budget surplus: The role of conservative growth forecasts

Aided by strong economic growth the Singapore government has been able to keep both the tax rate and the government expenditure rate low and yet generate healthy budget surpluses year after year. Although the gap between the tax rate and the government expenditure rate is the obvious source of the surplus, this paper shows the presence of another subtle source, a surplus generated by conservative growth forecasts that lay the base for revenue projections. An omitted variable bias in a model based on the tax smoothing hypothesis led us to consider the role played by the growth forecast error in predicting the budget surplus. Our computations show that on average the under-prediction of the tax base (GDP) must have contributed about S$ 376 million (or about 13%) per year to the realized budget surplus over the period 1990–2005. This appears to be simply a by-product of the Government's philosophy of “fiscal prudence”.     

Do Firms Use Tax Reserves to Meet Analysts’ Forecasts? Evidence from the Pre‐ and Post‐FIN 48 Periods

We examine whether firms decrease tax reserves to meet analysts’ quarterly earnings forecasts in the period prior to FIN 48, and whether that behavior changed following FIN 48. We use analysts’ forecasts of pretax and after‐tax income to impute premanaged earnings, or earnings before any tax manipulation. Pre‐FIN 48, we observe that firms reduce their tax reserves (i.e., increase income) when premanaged earnings are below analysts’ forecasts. Specifically, 78 percent of firm‐quarters that would have missed the analyst forecast if not for the tax reserve decrease, meet that target when the decrease is included. Furthermore, we find a significant positive association between the decrease in tax reserves and the deviation of premanaged earnings from analysts’ forecasts. In contrast, post‐FIN 48, we find no evidence that firms use changes in tax reserves to manage earnings to meet analysts’ forecasts. Thus, our results suggest that FIN 48 has, at least initially, curtailed firms’ use of tax reserves to manage earnings.     

The Macro Forecasting Record of the Indonesian Financial Authorities, 2004–15

A precondition for financial authorities’ macroeconomic effectiveness is a capacity to foresee economic conditions with reasonable accuracy. This article analyses the performance of Bank Indonesia (the central bank) and Indonesia’s Ministry of Finance in forecasting real GDP growth and consumer inflation over the last decade or so. It compares the quality of their forecasts with those of international institutions, aligning the timing of these forecasts to maximise comparability. Overall, the Indonesian authorities—especially the Ministry of Finance, in its revised central government budget (APBN-P)—perform respectably against their international comparators and there is no statistically significant bias in any of the forecasts. Still, there are mild indications of an optimistic bias in forecasts of inflation and growth, and all institutions tend to miss growth slowdowns. The results raise doubts about the value of fiscal policy for near-term macro stabilisation in Indonesia. Likewise, a wide range of uncertainty in forecasting inflation complicates the use of monetary policy for inflation targeting, at least one year ahead.     

The Effect of Enterprise Systems Implementation on the Firm Information Environment

This study uses an archival research design to assess the impact of enterprise systems on a firm's internal information environment as reflected in the production of management earnings forecasts. Specifically, the authors hypothesize that, if enterprise systems improve management's access to decision‐relevant internal information, higher quality management earnings forecasts should ensue. Consistent with disclosure theory and the purported technical characteristics of enterprise systems, the authors find a positive association between enterprise system implementations and subsequent increases in the likelihood of management forecast issuance and the accuracy of the forecasts. Additional robustness tests support the argument that improvements in management forecasts are due to improvements in the firm's internal information environment rather than to enhancements in management's ability to manage earnings. Beyond accumulating financial reporting information, the authors note that such systems provide management with information to make day‐to‐day operational decisions. Moreover, the paper provides a basis for considering management forecast qualities as a measurable proxy for improvements in the firm's internal information environment that result from information technology investments.     

LONG MEMORY IN THE VOLATILITY OF AN EMERGING FIXED‐INCOME MARKET: EVIDENCE FROM SOUTH AFRICA

This paper tests for long memory in volatility of fixed‐income returns; specifically, South Africa's local currency 10‐year government bond, given that the characterisation of stochastic long‐memory volatility is of interest and importance in portfolio and risk management. The long‐memory parameter is estimated using methods based on wavelets, which have gained prominence in recent years. Evidence of long memory in fixed‐income return volatility is conclusively demonstrated across a variety of volatility measures and wavelet forms. This finding suggests a pattern of time dependence, which may potentially be exploited to generate improved volatility forecasting performance especially over long horizons. This paper further extends the extant literature by comparing the predictive power of long‐memory forecasts with those obtained from a standard (short‐memory) generalised autoregressive conditional heteroskedasticity (GARCH) process. The results of this exercise suggest that the information content of long‐memory models does not lead to improved forecast accuracy. The GARCH(1,1) model is shown to provide the best forecasts across most horizons (i.e. daily, weekly and monthly). Forecast performance is further revealed to be sensitive to the choice of volatility proxy used. Finally, the derived volatility forecasts are generally very close, and in some cases, almost indistinguishable.     

Old stocks,new owners: Two cases of ownership change in China's stock market

During the 1990s, ownership of China's listed firms remained stable: state entities remained in control of restructured state-owned enterprises since only a minority of shares were allowed to trade publicly and to be owned privately. However, since 1999, the ownership of China's listed firms has become more fluid due to the development of an off-exchange market in ‘legal person’ shares. This paper examines two such cases of ownership change. The case of Taitai's take-over of Lizhu shows that transfer of control is now occurring on a commercial basis. However, the Baiwen case shows that buy-outs are still being organized by government entities to support failing state firms. The deals suggest that while the government is using all means to restructure listed firms, rather than de-list them, it is also moving to create a competitive market in control.     

Mixed-frequency approaches to nowcasting GDP: An application to Japan

In this paper, we discuss the approaches to nowcasting Japan’s GDP quarterly growth rates, comparing a variety of mixed frequency approaches including a bridge equation approach, Mixed-Data Sampling (MIDAS) and factor-augmented version of these approaches. In doing so, we examine the usefulness of a novel sparse principal component analysis (SPCA) approach in extracting factors from the dataset. We also discuss the usefulness of forecast combination, considering various ways to combine forecasts from models and surveys. Our findings are summarized as follows. First, some of the mixed frequency models discussed in this paper record out-of-sample performance superior to a naïve constant growth model. Second, albeit small, the SPCA approach of extracting factors improves predictive power compared with traditional principal component approach. Furthermore, we find that there is a gain from combining model forecasts and professional survey forecasts.