Performance of Analyst Short-term Trade Ideas

Do short-term trade ideas of professional stock analysts have merit? In their July 2019 paper entitled “Are Analyst Trade Ideas Valuable?”, Justin Birru, Sinan Gokkaya, Xi Liu and René Stulz examine the price impact of analyst trade ideas, which differ from stock ratings in that trade ideas:

1. Have horizons of only one week to three months.
2. Reflect expected short-term price changes in response to upcoming news (firm catalysts) or short-term overreaction/underreaction to recent news (temporary mispricing).
3. May be opposite in direction from the analyst’s rating on a stock.
4. Are typically issued on days with no firm news and no other analyst reports.

They estimate abnormal returns of trade ideas based on an equally weighted portfolios of stocks with similar size, book-to-market ratio and momentum characteristics. For trade idea buy and sell portfolios, they add a new stock at the close on the trading day after idea announcement and rebalance the portfolio on any day a stock is added or removed. Using a manually constructed sample of 4,167 buy ideas and 367 sell ideas from 688 analysts at 77 brokers involving 1,619 unique stocks during 2000 through 2015, they find that: (more…)