Economic Value of Analyst Recommendations in Australia: An Application of the Black–Litterman Asset Allocation Model

30 Pages Posted: 4 May 2013

See all articles by Peng William He

Peng William He

The University of Sydney

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business; Financial Research Network (FIRN)

Joel Fabre

affiliation not provided to SSRN

Date Written: June 2013

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.

Keywords: Analyst recommendations, Black–Litterman, Asset allocation

JEL Classification: G11, G17

Suggested Citation

He, Peng William and Grant, Andrew R. and Fabre, Joel, Economic Value of Analyst Recommendations in Australia: An Application of the Black–Litterman Asset Allocation Model (June 2013). Accounting & Finance, Vol. 53, Issue 2, pp. 441-470, 2013. Available at SSRN: https://ssrn.com/abstract=2260638 or http://dx.doi.org/10.1111/j.1467-629X.2012.00509.x

Peng William He (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
61-2-9036-7991 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Joel Fabre

affiliation not provided to SSRN

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