Analyst Forecasts and Price Discovery in Futures Markets: The Case of Natural Gas Storage

Abstract

We investigate analyst forecasts in a unique setting, the natural gas storage market, and study the contributions of analysts in facilitating price discovery in futures markets. Using a high frequency database of analyst storage forecasts, we show that the market appears to strongly condition expectations regarding a weekly storage release on the analyst forecasts and beyond that of a number of statistical-based models. Further, we find evidence that the market looks through the reported consensus estimate of analyst forecasts and places differential emphasis on the forecasts of analysts according to their prior performance. Furthermore, it appears that the market focuses on analysts' long term rather than recent forecasting performance. We construct a complete and survivor-bias-free database of these analyst forecasts using Bloomberg surveys from April 1997 through August 2005. Using a rational expectations framework, we examine how the market incorporates these analyst forecasts into prices. We analyze the futures price reaction to the release of the weekly storage number and first find that the market reaction is stronger when conditioning expectations on the Bloomberg consensus analyst forecasts rather than on the number of statistical and historical-based forecast methods. We find that the futures price exhibits higher levels of response to the Bloomberg based surprise component of the announcements, that such specifications have superior J-test explanatory power, and that these results hold across various information environments. We then explore whether and how the market, when conditioning expectations on analyst forecasts, differentiates among analysts according to their forecasting ability. Our setting contrasts with that of equity analysts because: analyst forecasts are produced with high frequency (weekly), the individual forecasts are not revised, the variable being forecasted has, in a sense, already transpired, the window of opportunity for analysts to herd is reduced, and finally, the alleged conflicts of interest are mitigated.