Abstract
We assess investment value of sell-side analyst recommendations from the standpoint of portfolio risk. We match I/B/E/S consensus recommendations issued for U.S.-listed equities during January 2015 with realized volatility of daily security returns up to one year following recommendation issue. Using a flexible semiparametric copula model we find recommendation levels to be associated with future changes in volatility, suggesting that analyst ratings can help manage portfolio risk. This relationship appears to be asymmetric and is most pronounced among the best-rated securities which experience largest volatility declines after recommendation issue. These effects are conditional on recommendation changes. We demonstrate that stock selection on the basis of such public recommendations can lead to a substantial reduction of portfolio value-at-risk.
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