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An Anatomy of Sell Side Analysts’ Target Price Forecasting Ability: The Case of Pakistan

Dr Nawazish Mirza, Lahore School of Economics
Birjees Rahat, Lahore School of Economics
Sanakhawan Hussain, Alfalah GHP Investment Management Limited

This paper examines the performance of sell side analysts based on their one year forward target price over a period of five years, between 2008 and 2013, using a sample of 130 recommendations. We find that only 5% of the target prices were met at the end of the forecast period while 30% of the recommendations were achieved at some point in time during the forecast horizon. The analysts’ forecasts were optimistic with average target price returns exceeding actual returns by 12% with an absolute forecast error of 65%. Further, we segregated the target price into multiplier and discounted valuation methodologies and find the former to be more accurate with 50% of the target prices being achieved during the sample period compared to 10% for discounted valuations. We link the forecast error to the discount rate using a small sample of 40 recommendations and report that capital asset pricing model (CAPM) misprice the cost of equity resulting in optimistic target price. When we replace CAPM with multifactor asset pricing models for estimation, our synthetic target prices resulted in an improved forecast with 40% discounted valuation forecasts realizing during the target horizon. We conclude by advocating the use of multifactor asset pricing frameworks in economies like Pakistan where stock markets are subject to volatility clustering and higher order moments.


Dr Nawazish Mirza is Associate Professor of Finance at Lahore School of Economics. He holds a doctorate degree in quantitative finance from University of Paris Dauphine. He teach courses in the areas of Risk Management, Corporate Finance, Investment Analysis and Portfolio theory at MBA and Doctorate level. He also provides consultancy to The Biogerontology Research Foundation UK and JCR VIS Credit Rating Company Limited.

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posted by S A J Shirazi @ 5/30/2014 10:30:00 AM,

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