Financial Analysts Impact on Stock Volatility
39 Pages Posted: 15 Nov 2012
Date Written: July 26, 2012
The arrival of new information helps financial markets to value assets, but it may has the side-effect of increasing their volatilities. A better knowledge of the mechanism that links relevant news and stock prices would help both private and institutional agents to improve the calibration of the risks that implies in a given asset.
Financial analysts play a key role in distinguishing which news are relevant for the valuation of an asset, and the changes in their recommendations are signals of new information in the market. This paper studies the impact that changes in financial analyst recommendations have on returns and also on volatility instead of the traditional literature that focuses only in the impact on prices. Twenty stocks from the New York Stock Exchange are daily tracked for five years along with the recommendations given by financial analysts. We have modeled stock returns by a Markov Regime Switching model in a similar way as in Schaller and van Norden (1997) and we have found two states of low and high volatilities. Thus, we can measure the volatility generated by the new information from financial analysts. We have also found strong evidence that the probability of being in the state of high volatility increases when a Financial Analyst issues a new recommendation.
Keywords: Financial analysts recommendations, news arrival, Markov Regime Switching model, pharmaceutical companies
JEL Classification: G14, C22, L65
Suggested Citation: Suggested Citation