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Alternative Market Briefing

New research shows sell-side analyst trading ideas can lead to outperformance

Tuesday, July 23, 2019

Bailey McCann, Opalesque New York:

Do sell-side analyst's trade ideas have value? New research from Ohio State University shows that the stock-price impact of analyst trade ideas is at least as large as the impact of stock recommendation, target price, and earnings forecast changes, and that investors following trade ideas can earn significant abnormal returns.

In a working paper, Everett D. Reese Chair of Banking and Monetary Economics René Stulz; Professors Sinan Gokkaya, Xi Liu, and Justin Birru outline the ways in which analyst trade ideas can impact portfolio returns. The authors note that analyst trade ideas differ from fundamental research calls in that they are usually catalyst driven and have shorter-term trading horizons. (The average trade idea expires in 60 days versus a price target which can last for as long as a year.) Trade ideas are also usually issued on days when there aren't predictable events like company announcements or earnings calls. Often trade ideas can follow an over or underreaction to a news event when analysts notice the potential for mispricing that will likely resolve itself over the longterm. For investors that pay close attention to these ideas, trading them can be a source of outperformance.

The authors of the paper analyzed 4,543 trade ideas manually constructed from Thomson Reuters Investext and Thomson Reuters Eikon, identifying buy/sell ideas issued by 688 unique sell-side analysts employed at 77 unique brokerage ho......................

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