Record Details

An Econometric Model to Forecast Equity Prices

Journal of Financial Innovation

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Field Value
 
Title An Econometric Model to Forecast Equity Prices
 
Creator Franzero, Pietro Giuseppe
Chela, João Luiz
 
Subject —
Forecast, Equity prices, Sell-side analyst, Econometric model, ARIMA
 
Description PurposeDCF models have become a sine qua non in stock pricing, being widely used by sell-side analysts to calculate target prices. On the other hand, time series models, such as ARIMA, are usually disregarded for this purpose under the theoretical framework provided by the efficient market hypothesis. This paper compared the short-term performance of stock price forecasts generated by an econometric model versus those of sell-side analysts.ApproachUsing a set of stock indices and individual stocks from Brazil and the US, and controlling for different levels of analyst coverage and share liquidity, we performed an in-sample test between an ARIMA (p,d,q) model with external regressor, the analysts’ EPS consensus, and analysts’ target price consensus. The test compared four measures: i) absolute percentage error, ii) standard deviation of errors, iii) correlation with the price at issuance date and iv) abnormal returns produced. To ensure comparability between both series, we used a rolling scheme for the training set. FindingsResults were surprising. Average correlation between target price and price at issuance date reached 0.29 (ARIMA) versus 0.87 (analysts), while forecast error was reduced from 30.7% (analysts) to 10.5% (ARIMA). ARIMA was also more stable, having a standard deviation of 9.1%, against 14.3%. Finally, the model produced average abnormal returns of 30%, against 11.7%.ValueThe evidence supports the call that time series models can be an accurate source to generate stock price forecasts in the short term, or at least more accurate than the target prices issued by sell-side analysts, being a valuable finding for market participants.
 
Publisher Instituto Brasileiro de Inovacao Financeira - IBRIF
 
Contributor —
 
Date 2015-12-19
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
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Format application/pdf
 
Identifier http://www.ibrif.org/ojs/index.php/jofi/article/view/37
10.15194/jofi_2016.v2.i1.37
 
Source Journal of Financial Innovation; Early View
Journal of Financial Innovation; Early View
2359-1005
2359-1005
 
Language eng
 
Relation http://www.ibrif.org/ojs/index.php/jofi/article/view/37/pdf
 
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Rights Copyright (c) 2015 Journal of Financial Innovation
http://creativecommons.org/licenses/by-nc-nd/4.0