Economic value of analyst recommendations in Australia

An application of the Black-Litterman asset allocation model

Peng W. He*, Andrew Grant, Joel Fabre

*Corresponding author for this work

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

This study empirically examines the investment value of security analyst recommendations on constituent stocks of the S&P/ASX 50 index. We find that stocks with favourable (unfavourable) recommendations on average outperformed (underperformed) the benchmark index. An investment strategy using the Black-Litterman asset allocation model that incorporates consensus analyst recommendations, in conjunction with daily rebalancing, outperforms the market in terms of return and risk-adjusted performance measures. The investment strategy involves high levels of trading, and no significant abnormal returns are achieved after transaction costs. Less frequent rebalancing, under most situations, causes a decrease in both performance and turnover. Filtering of dated recommendations causes an increase in turnover, while having mixed effects on investment returns.

Original languageEnglish
Pages (from-to)441-470
Number of pages30
JournalAccounting and Finance
Volume53
Issue number2
DOIs
Publication statusPublished - Jun 2013

Keywords

  • Analyst recommendations
  • Asset allocation
  • Black-Litterman
  • G11
  • G17

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