Economic value of analyst recommendations in Australia: an application of the Black–Litterman asset allocation model |
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Authors: | Peng W. He Andrew Grant Joel Fabre |
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Affiliation: | 1. Discipline of Finance, University of Sydney, Sydney, NSW, Australia;2. Mizuho Securities Co. Ltd., Tokyo, Japan |
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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. |
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Keywords: | Analyst recommendations Black– Litterman Asset allocation G11 G17 |
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