TY - JOUR

T1 - The time-varying performance of analyst recommendation revisions: Do market conditions matter?

AU - Chen Su

AU - Robert Hudson

AU - Zhang, Hanxiong

PY - 2020/5/2

Y1 - 2020/5/2

N2 - This study examines the time-varying performance of investment strategies following analyst recommendation revisions in the UK stock market, with specific emphasis on the impact of changing market conditions. We find a negative relationship between the recommendation performance and market conditions as measured in terms of past market return and market volatility. In particular, the upgrade (downgrade) portfolio generates significantly positive (negative) net abnormal returns in bad market conditions (e.g., the dot-com bubble burst in 2000 and the credit crisis in 2007), but not in other periods of time. Moreover, our non-temporal threshold regression analysis shows that the reported negative relationship disappears when market conditions become better, i.e., when the past market return (market volatility) is higher (lower) than a certain level, indicating the importance of taking non-linearity into account in the long sample period as examined in this study. Our time-series bootstrap simulations further confirm that the superior recommendation performance in bad market conditions is not due to random chance; analysts have certain skills in making valuable up/downward revisions in bad markets.

AB - This study examines the time-varying performance of investment strategies following analyst recommendation revisions in the UK stock market, with specific emphasis on the impact of changing market conditions. We find a negative relationship between the recommendation performance and market conditions as measured in terms of past market return and market volatility. In particular, the upgrade (downgrade) portfolio generates significantly positive (negative) net abnormal returns in bad market conditions (e.g., the dot-com bubble burst in 2000 and the credit crisis in 2007), but not in other periods of time. Moreover, our non-temporal threshold regression analysis shows that the reported negative relationship disappears when market conditions become better, i.e., when the past market return (market volatility) is higher (lower) than a certain level, indicating the importance of taking non-linearity into account in the long sample period as examined in this study. Our time-series bootstrap simulations further confirm that the superior recommendation performance in bad market conditions is not due to random chance; analysts have certain skills in making valuable up/downward revisions in bad markets.

U2 - 10.1111/fmii.12126

DO - 10.1111/fmii.12126

M3 - Article

SP - 65

EP - 89

JO - Financial Markets, Institutions and Instruments

JF - Financial Markets, Institutions and Instruments

SN - 1468-0416

ER -