Download or read book Analyst Earnings Forecasts and the Cross-Section of Stock Returns written by Grawehr Louis-Emmanuel and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis analyzes the ability of a value-to-price ratio (V/P) to predict the cross-section of European stock returns, where V is based on the residual income valuation model using analysts' consensus earnings estimates from I/B/E/S. The V/P ratio is designed to identify stocks where market expectations of earnings are not accurately impounded into prices. For the constituents of the Stoxx Europe 600 index in the years 2002-2014, I test whether a self-financing portfolio taking a long position in the top quintile of V/P and a short position in the bottom quintile of V/P generates abnormal returns. I find that this strategy does not exhibit a statistically significant positive alpha in the context of standard asset pricing models. I argue that stock prices reflect analyst forecasts more accurately and more quickly than before, leading to the unprofitability of the strategy. The strategy does however have a positive and significant exposure to the Quality-Minus-Junk factor proposed by Asness, Frazzini and Pedersen (2014). Indeed, the V/P ratio is positively related to a self-constructed quality index incorporating the dimensions profitability, growth, safety and payout. This suggests that returns from picking stocks where market earnings expectations are not accurately reflected in prices are in large part driven by their quality characteristics.