FORECASTING EARNINGS COMPOSITE VARIABLES, FINANCIAL ANOMALIES, AND EFFICIENT JAPANESE AND US PORTFOLIOS

In this study we address the creation of efficient portfolios with par ticular emphasis on earnings forecast and value strategies in Japan an d the U.S. We show that market-neutral portfolios produce much higher returns for a given level of risk than merely creating efficient (long ) portfolios. Thus use of a multi-factor risk model is useful for the 1988-1997 period for creating market-neutral portfolios and one can cr eate the market-neutral equity selection and portfolio construction mo dels. We find that the inclusion of consensus I/B/E/S forecasts, revis ions, and momentum substantially increases the market-neutral portfoli o average annual returns of Japanese and U.S. portfolios. A value-only model works quite well in a Japanese market-neutral strategy and the use of I/B/E/S forecasts significantly enhances the returns; however, in the U.S., we find that the I/B/E/S forecasts are necessary for an e ffective market-neutral strategy. (C) 1998 Elsevier Science B.V.