Discussion paper

DP12179 Automated Earnings Forecasts:- Beat Analysts or Combine and Conquer?

Prior studies attribute analysts' forecast superiority over time-series forecasting models to their access to a large set of rm, industry, and macroeconomic information (an information advantage), which they use to update their forecasts on a daily, weekly or monthly basis (a timing advantage). This study leverages recently developed mixed data sampling (MIDAS) regression methods to synthesize a broad spectrum of high
frequency data to construct forecasts of rm-level earnings. We compare the accuracy of these forecasts to those of analysts at short horizons of one quarter or less. We find that our MIDAS forecasts are more accurate and have forecast errors that are smaller than analysts' when forecast dispersion is high and when the rm size is smaller. In addition, we find that combining our MIDAS forecasts with analysts' forecasts systematically outperforms analysts alone, which indicates that our MIDAS models provide information orthogonal to analysts. Our results provide preliminary support for the potential to automate the process of forecasting rm-level earnings, or other accounting performance measures, on a high-frequency basis.

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Citation

Ghysels, E (2017), ‘DP12179 Automated Earnings Forecasts:- Beat Analysts or Combine and Conquer?‘, CEPR Discussion Paper No. 12179. CEPR Press, Paris & London. https://cepr.org/publications/dp12179