Three Essays on the Impact of Analysts on Financial Markets
Date
2019-06-25
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Abstract
This thesis studies three different topics on the impact of analysts on financial markets. The first chapter documents that the price of analysts’ dispersion risk in the cross-section of stock returns changes over time, in particular, turns positive in periods of high analyst dispersion. Our result holds using 100 test portfolios that are double-sorted on their betas and their coefficients on aggregate dispersion, as well as numerous test portfolios. We construct a general equilibrium model in the spirit of Merton’s ICAPM, in which analysts of different types have heterogeneous beliefs and provide different forecasts of a macroeconomic factor. The consumer does not trust either analyst fully, and dynamically adjusts the weight given to each analyst, given the history of their past forecast performance. In equilibrium, each asset’s risk premium depends on its exposure to three factors: the market portfolio, the macroeconomic factor, and, a ”flight-to-safety” factor. The first term increases with dispersion, while the third term declines. The latter decline occurs because consumers shift into assets with lower cash flow betas during periods of high dispersion. The model provides a testable implication that the changing sign of the price of risk is due to the flight-to-safety during periods of high dispersion. We find strong support for such a flight to safety in the data. The second chapter questions the view that all analysts are equal and develop the idea that analysts may have different strategic behaviour to influence the market. The main contribution is to provide evidence that the market assigns different weights to different analysts and to show that more experienced analysts have more significant impact on asset prices and trading activity. The third chapter studies the relation between dispersion, short sale constraints, and stock returns. The main contribution is to analyze the high returns of a portfolio formed by unconstrained and low opinion divergence stocks. Such portfolio contains stocks with low total and idiosyncratic risks and low leverage. Three and four factors models, as well as liquidity factors models, cannot account for these high abnormal returns.
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Analysts on Financial Markets
Citation
Farhat, A. (2019). Three Essays on the Impact of Analysts on Financial Markets (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.