The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts
Prior studies document that financial analysts' earnings forecasts are inefficient with respect to various information variables. All of these studies conduct tests based on the ordinary least squares (OLS) regression, which implicitly assumes that analysts face a quadratic loss function. Howev...
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| Format: | Dissertation (University of Nottingham only) |
| Language: | English |
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2008
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| Online Access: | https://eprints.nottingham.ac.uk/22493/ |
| _version_ | 1848792416635584512 |
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| author | Su, Haochen |
| author_facet | Su, Haochen |
| author_sort | Su, Haochen |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | Prior studies document that financial analysts' earnings forecasts are inefficient with respect to various information variables. All of these studies conduct tests based on the ordinary least squares (OLS) regression, which implicitly assumes that analysts face a quadratic loss function. However, we argue that financial analysts are most likely to face a linear loss function. In this case, analysts try to minimize their mean absolute forecast errors (rather than their mean squared forecast errors). Therefore, we test the rational expectations hypothesis using the LAD (the linear loss function) as well as the OLS (the quadratic loss function) regressions, and incorporate most information variables documented in prior research. Consistent with prior studies, we find that analysts' forecasts are inefficient with OLS regressions. In contrast, we find little evidence of forecast inefficiency with LAD regressions. We conclude that the evidence of analysts' forecast inefficiency in prior research is largely attributed to the assumption of a quadratic loss function. |
| first_indexed | 2025-11-14T18:44:04Z |
| format | Dissertation (University of Nottingham only) |
| id | nottingham-22493 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-14T18:44:04Z |
| publishDate | 2008 |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-224932018-02-15T23:57:33Z https://eprints.nottingham.ac.uk/22493/ The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts Su, Haochen Prior studies document that financial analysts' earnings forecasts are inefficient with respect to various information variables. All of these studies conduct tests based on the ordinary least squares (OLS) regression, which implicitly assumes that analysts face a quadratic loss function. However, we argue that financial analysts are most likely to face a linear loss function. In this case, analysts try to minimize their mean absolute forecast errors (rather than their mean squared forecast errors). Therefore, we test the rational expectations hypothesis using the LAD (the linear loss function) as well as the OLS (the quadratic loss function) regressions, and incorporate most information variables documented in prior research. Consistent with prior studies, we find that analysts' forecasts are inefficient with OLS regressions. In contrast, we find little evidence of forecast inefficiency with LAD regressions. We conclude that the evidence of analysts' forecast inefficiency in prior research is largely attributed to the assumption of a quadratic loss function. 2008 Dissertation (University of Nottingham only) NonPeerReviewed application/pdf en https://eprints.nottingham.ac.uk/22493/1/08MAlixhs8.pdf Su, Haochen (2008) The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts. [Dissertation (University of Nottingham only)] (Unpublished) earnings forecasts loss function assumptions |
| spellingShingle | earnings forecasts loss function assumptions Su, Haochen The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts |
| title | The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts |
| title_full | The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts |
| title_fullStr | The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts |
| title_full_unstemmed | The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts |
| title_short | The impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts |
| title_sort | impact of loss function assumptions in rational expectations tests on the efficiency of financial analysts' earnings forecasts |
| topic | earnings forecasts loss function assumptions |
| url | https://eprints.nottingham.ac.uk/22493/ |