Mean reverting in stock ratings distribution

Huai-Chun Lo () and Chia-Ying Chan ()
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Huai-Chun Lo: Yuan Ze University
Chia-Ying Chan: National Taipei University, University Rd. Sanshia Dist

Review of Quantitative Finance and Accounting, 2023, vol. 60, issue 3, No 7, 1065-1097

Abstract: Abstract This study elucidates how the distribution of stock recommendations influences brokerages’ revision strategies and investors’ response to the revisions. We first observe that brokerages tend to adopt mean reverting strategies when their current recommendation distribution deviates too much from their long-term mean buy ratio. However, this process is not straightforward, because brokerages adopt all buy- and sell-type strategies simultaneously. Further, we find that a “mean reverting” strategy for recommendation revisions provokes a less significant reaction from the market. In addition, any revision that enlarges the deviation results in a lower response because of the market’s suspicions of relative optimism or pessimism on the brokerage’s part. We conclude that a steady buy ratio is the best strategy for the brokerage to obtain most effective recommendation returns.

Keywords: Recommendation distribution; Mean reverting; Recommendation revision; Market performance (search for similar items in EconPapers)
JEL-codes: D82 G11 G14 G24 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-022-01121-4

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