Forecasting earnings composite variables, financial anomalies, and efficient Japanese and US portfolios

In this study we address the creation of efficient portfolios with particular emphasis on earnings forecast and value strategies in Japan and the US. 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 create the market-neutral equity selection and portfolio construction models. We find that the inclusion of consensus I/B/E/S forecasts, revisions, and momentum substantially increases the market-neutral portfolio average annual returns of Japanese and US 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 US, we find that the I/B/E/S forecasts are necessary for an effective market-neutral strategy.