Dispersion of Financial Analysts' Earnings Forecasts and the (Option Model) Implied Standard Deviations of Stock Returns

Authors

  • BIPIN B. AJINKYA,

  • MICHAEL J. GIFT

    Search for more papers by this author
    • University of Florida and Indiana University, respectively. We would like to thank Rashad Abdel-khalik, James Ohlson, Gerald Salamon, and Gregory Waymire for helpful comments. We are especially grateful to an anonymous referee for suggestions that markedly improved this paper. Remaining errors are our own.


ABSTRACT

This study examines whether the information implied by simultaneous levels of option and stock prices (specifically, the implied standard deviation of returns) reflects other contemporaneously available information. The independent contemporaneous measure considered is the observed dispersion (across several financial analysts), at a point in time, in the forecasts of earnings per share for a given firm. The results indicate that implied standard deviations clearly reflect the contemporaneous dispersion in analysts' forecasts incrementally, i.e., beyond the information contained in the historical time series of returns.

Ancillary