Can Investors Profit from Information Diveristy? The Wisdom of Crowds in Security Analyst Recommendations

53 Pages Posted: 28 Nov 2017 Last revised: 24 Jan 2018

See all articles by Ilona Mostipan

Ilona Mostipan

Analysis Group; University of Oxford, Saïd Business School

Date Written: November 16, 2017

Abstract

There is heterogeneity in individual forecasts of any variable — inflation, corporate earnings, etc. The standard consensus estimate takes a simple average of individual forecasts, implicitly treating each forecast as a common signal plus noise. If some individuals know more than others, then a consensus estimate is not necessarily the optimal way to combine forecasts. I show how a recently developed statistical technique can infer overlap in information across agents and I apply it to stock recommendations of sell-side analysts. I find a trading strategy that delivers an alpha of 2-3% on an annualized basis, net of transaction costs, suggesting that information diversity is prevalent, economically significant, and tradable.

Keywords: Asset pricing; Information aggregation; Forecasts; Simulation; Analysts

JEL Classification: G12, G14, E17, C15, C53, C58

Suggested Citation

Mostipan, Ilona, Can Investors Profit from Information Diveristy? The Wisdom of Crowds in Security Analyst Recommendations (November 16, 2017). Available at SSRN: https://ssrn.com/abstract=3076118 or http://dx.doi.org/10.2139/ssrn.3076118

Ilona Mostipan (Contact Author)

Analysis Group ( email )

San Francisco, CA 94111
United States

University of Oxford, Saïd Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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