Portfolio Returns and Target Prices

36 Pages Posted: 6 Dec 2007 Last revised: 27 Jun 2008

See all articles by Stefano Bonini

Stefano Bonini

Stevens Institute of Technology - School of Business

Antonio Salvi

Jean Monnet University

Roberto Bianchini

Bocconi University

Laura Zanetti

Bocconi University - Department of Finance


In this paper we examine the profitability of trading strategies based on target prices embedded in equity research reports. We adopt target prices as information signals to build our portfolio strategy. At the first stage, we exploit implicit returns (difference between the current price and the target price) as a buying or short selling signal to open every transaction in the portfolio. Next, we use raw and adjusted target prices as a closing transaction signal. We build three different strategies to verify if the overshooting of target prices revealed by several studies could affect the profitability of a trading strategy based on these target prices.

We have formed four portfolios within every strategy to verify whether analysts' target prices have any investment value. We find that all strategies deliver positive abnormal returns against the market. In particular, the highest and lowest implicit return classes exhibit the highest stock returns and abnormal returns. In the last part control these returns for systematic risk, factors through the CAPM and the Fama & French three factor model. The positive performances of our strategies persist and, in particular, our strategies beat the market with consistent abnormal returns in all the four implicit return classes analyzed. From the three factors equation, it seems that analysts tend to advise buying stocks with risk above the average market risk, with growth profile and with large market value. Conversely analysts advise selling value stocks and those with a negative beta.

Keywords: Target Prices, Analyst recommendation, Portfolio strategy

JEL Classification: G11, G12, G14

Suggested Citation

Bonini, Stefano and Salvi, Antonio and Bianchini, Roberto and Zanetti, Laura, Portfolio Returns and Target Prices. Available at SSRN: https://ssrn.com/abstract=1063861 or http://dx.doi.org/10.2139/ssrn.1063861

Stefano Bonini (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Antonio Salvi

Jean Monnet University ( email )

34, rue Francis Baulier
Saint-Etienne, 42023

Roberto Bianchini

Bocconi University ( email )

Via Sarfatti 25
20136 Milan, MI 20136

Laura Zanetti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136

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