Portfolio Strategies Based on Analysts' Consensus

Abstract:     
Financial analysts' research activity seems to be important for investors in their investment decisions. Understanding if financial analysts' reports can influence the market and the degree of reliability of their forecasts has been a theme lively debated in the academic literature but also in the press, mainly because of recent financial scandals. The main objective of the paper is to calculate the investment value of financial analysts' recommendations on companies listed in the Italian Stock Exchange and to empirically verify the possibility of profiting from relying on the average consensus of recommendations. We have enclosed in the analysis all the 16,634 reports issued between the 1st January 1999 and the 23rd July 2004 and available on the website of the Italian Stock Exchange. We have classified companies by quarter, based on the average consensus by analysts, and we have formed five portfolios based on this consensus. Furthermore, we have calculated the excess returns of each portfolio in each quarter. Our results seem to suggest that analysts' rating have indeed investment value, even if investors should carefully consider neutral recommendations that in reality seem to be negative one. These results also give some interesting regulatory suggestions.

Number of Pages in PDF File: 27

Keywords: Analysts, Consensus, Market Efficiency, Portfolio Strategies, Barber

JEL Classification: G14

working papers series