Abstract
We assess investment value of stock recommendations from the standpoint of market risk. We match I/B/E/S (Institutional Brokers’ Estimates System) consensus recommendations issued in January 2015 for a cross-section of u.S. public equities with realized volatility of these papers, showing that these recommendations signifcantly correlate with subsequent changes in market risk. Thus, the results indicate that to some extent the analysts can predict an increase or decrease in risk, which can beneft asset management. However, the relationship between the recommendations and the risk is not linear and depends on the specifc recommendation. using a semi-parametric copula model, we fnd recommendation levels to be associated with future changes in volatility. We further fnd this relationship to be asymmetric and most pronounced among the best-rated stocks which experience largest volatility declines. We conduct a trading simulation showing how stock selection based on such ratings can lead to a reduction in portfolio-level value-at-risk.
Highlights
AB S T R A CT We assess investment value of stock recommendations from the standpoint of market risk
We match I/B/E/S (Institutional Brokers’ Estimates System) consensus recommendations issued in January 2015 for a cross-section of U.S public equities with realized volatility of these papers, showing that these recommendations significantly correlate with subsequent changes in market risk
Using a semi-parametric copula model, we find recommendation levels to be associated with future changes in volatility
Summary
AB S T R A CT We assess investment value of stock recommendations from the standpoint of market risk. Using a semi-parametric copula model, we find recommendation levels to be associated with future changes in volatility. We further find this relationship to be asymmetric and most pronounced among the best-rated stocks which experience largest volatility declines. For citation: Medovikov I.S. Can stock analysts predict market risk? В контексте научной литературы на данную тему результаты исследования, по-видимому, представляют собой одну из первых попыток установить эмпирическую зависимость между рекомендациями аналитиков и рыночным риском. Для цитирования: Medovikov I.S. Can stock analysts predict market risk? While the stock recommendations and ratings is- nounced among best-rated securities which appear sued by sell-side security analysts at major banks to experience largest volatility declines, while the and brokerage houses continue to receive consider- converse does not seem to hold for worst-rated stocks
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