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Under the guidance of:
Prof. Parama Barai
Presented By: Sovan Nayak 11BM60077
sell are given by comparing the target price with the current market price .Contains a detailed description of the financial & operational performance of the company and the methodologies adopted by the analyst to arrive at the decision and finally a recommendation for the investor .buy. hold or neutral.Generally the recommendations .A forecast of the firm’s future earnings. a target price and an investment recommendation .In India every year lots of equity research reports .are published giving recommendations about a particular stock .Introduction .
Access to information is also not uniformly available to all research firms though the information is public . .Each of the firm has its own way of research and efforts and resources spend for a particular report .Funding is different for different firms in the research.All these create a fertile ground for conflicts of interest that can affect the quality and objective of the research .Problem formulation .External influences also have its role in distorting the research .
Thirdly. the conflict of interests issue regarding the preparation of the reports was delved into. .Major concerns . investors) is a debatable topic. .The ability of analysts to offer a valuable service to their clients (i. some of the research explored the ability of equity analysts to provide accurate forecasts.e. .Secondly.
Objectives of the study • To explore the ability of equity analysts to provide accurate forecasts • To determine the accuracy of forecasting using accuracy metrics • To determine the factors and their importance in forecasting • To derive a model for forecasting .
Works have been done in exploring the informative nature of other parts of the report like the earnings forecast and recommendations (Francis and Soffer. (2007) found that analyst firms release are more accurate and less optimistic forecast when the covering stocks are largely owned by institutional investors .. 2005) and the target price. the accuracy issue and the conflict of interest issue Few observations: . the strengths of the analyst’s arguments and recommendation base (Asquith et al. 2003). .Review of Literature Academic research so far has found three main factors influencing the behavior of financial analyst namely profitability issue.A study conducted by Ljungqvist et al.
A positive correlation has been found between the forecasted earning’s accuracy and the reputation of the report publisher.Review of Literature Few have examined the correlation between the rating distribution of different analyst firms and the profitability of stock recommendations. A strong correlation has been seen between the accuracy of earning forecast and recommendations for profit. - - - . The works that focused on the accuracy part compared and measured the ability of the analysts or the firms to forecast the target price by considering all possible drivers. Most of the ongoing studies are designed to test the profitability of various trading strategies.
the volume traded in last 3 years and the geometric mean of the daily HPR on the stock for last 2 years of the date of report for the company is taken.MoneyControl for balance sheet of companies Input: .BSE India .The beta of the company is taken . .From the balance sheet the PAT of last 3 years form the date of report.The price after 1 year. method used (DCF.The growth rate of stock market is taken . the maximum and minimum price within the 1 year from the date of report and target date are noted. multiples). sell. hold).Set of Analyst reports has been collected .Methodology Source of data collection: .current market price and the date of the report are collected. . .The Target price. recommendations(buy.
r.t.Percentage deviation of the target price form the maximum price or the minimum price attained in the year between the report date and the target date -Percentage deviation of the actual price from the target price w.Methodology Accuracy of the target price The following methods are used: Binary metric . .Percentage deviation of the actual price after 1 year from the target price Cardinal measure of the forecasting errors – the forecasting error is usually measured by calculating the spread between the actual price at the end of the forecasting period and the forecasted price .to distinguish between accurate forecasts and failed forecasts. market price on the date of report .
PAT Y-1. beta. HPR .Methodology The model . growth rate of sensex since 2006 till date of report. Vol Y-2 Model II Dependent variable: target price Independent variable: current market price.the model can be used to determine the weightage of different factors contributing to the inaccurate forecast . PAT Y-1. beta. Vol Y-1. Vol Y-1. growth rate of sensex.to determine target price by giving the necessary inputs Process: Regression Model I Dependent variable: target price Independent variable: current market price. PAT Y-2.
91% * Percentage deviation of target price from actual price .09% 13.73% 40.64% 22.Findings Accuracy Metrics: Accurate Accurate Accurate Accurate Accurate forecast with forecast with forecast with forecast with forecast with 5%* 10%* 15%* 25%* 35%* 4.55% 9.
Findings Magnitude of the forecasting error: • Positive error signals an excess of optimism in forecasting • Negative error signals an excess of pessimism in forecasting Metric I Percentage of optimistic forecast Percentage of pessimistic forecast 50% Metric II 59.09091% 50% 40.90909% Metric I: % deviation of target price form actual price wrt current price Metric II:% deviation of target price from the maximum or minimum price wrt current price .
1176 PAT Y-2 – 2.149409925 0..984305 Adjusted R Square 0.6761641 2.7700834 -1.679334518 0.92E-07 Vol Y-2 Error percentage(actual .452 + 1.2E-06 1.106050532 2.18 Beta + .72727273 10% 45.83 G + 253.59E-13 Growth rate of sensex 150.066941 CMP 1.199257 V Year -2 1.45454545 15% 59.086CMP + 150.0398334 0.508841 Beta 253.465855818 0.128873375 0.2257 PAT Y-1 .225768 0.452 104.040665268 26.2E-06 Vol Y-1 + 1.052958 PAT Year -2 -0.975854 Standard Error 139.63636 .65095E-06 -1.3594 Coefficients Standard Error t Stat P-value Intercept -209.92E-07 8.814803 Target Price = -209.71462787 9.estimated) 5% 22.271095 V Year -1 -2.086357 0.8393 222.0143E-07 0.3525525 0.1846 102.102312574 -1.028355 PAT Year -1 0.999158855 0.Findings Model I: Regression Statistics Multiple R 0.1176 0.239038208 0.992122 R Square 0.09091 20% 63.
977854 Standard Error 143.8515 97.04275 6.326 + 1.Findings Model II: Regression Statistics Multiple R 0.031593 0.539 0.5E-06 5642.34298 27.992059 R Square 0.37049 0.1368 214.0914 PAT Y-1 – 1.084CMP + 243.53 Beta + .509 HPR t Stat -1.219759 0.81818 15% 54.984181 Adjusted R Square 0.280668 2.043085 0.72727 10% 31.199249 2.99 P-value 0.209764 2.67803 1.326 125.039195 243.42E-07 57807.estimated) 5% 22.63636 .091421 -1.084849 0.73E-14 0.13 G + 214.097608 Coefficients Standard Error -168.4217 Intercept CMP Growth rate of sensex Beta PAT Year -1 V Year -1 HPR Target Price = -168.138479 -2.08685 0.04934 0.54545 20% 63.5E-06 Vol Y-1 + 5642.509 189.3382 1.923536 Error percentage(actual .
- To determine the contributing factors towards accuracy of analyst report If those factors are very volatile then the accuracy of analyst report is under doubt The models can be used to forecast future price/target price with 10% of significance level .Practical application An insight into the accuracy level of analyst report and make investors cautious of overdependence on the reports - .
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