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A Time-Series Bootstrapping Simulation Method to Distinguish Sell-Side Analysts’ Skill from Luck

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

Listed:
  • Chen Su
  • Hanxiong Zhang

Abstract

Data mining is quite common in econometric modeling when a given dataset is applied multiple times for the purpose of inference; it in turn could bias inference. Given the existence of data mining, it is likely that any reported investment performance is simply due to random chance (luck). This study develops a time-series bootstrapping simulation method to distinguish skill from luck in the investment process. Empirically, we find little evidence showing that investment strategies based on UK analyst recommendation revisions can generate statistically significant abnormal returns. Our rolling window-based bootstrapping simulations confirm that the reported insignificant portfolio performance is due to sell-side analysts’ lack of skill in making valuable stock recommendations, rather than their bad luck, irrespective of whether they work for more prestigious brokerage houses.

Suggested Citation

  • Chen Su & Hanxiong Zhang, 2020. "A Time-Series Bootstrapping Simulation Method to Distinguish Sell-Side Analysts’ Skill from Luck," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 55, pages 2011-2052, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0055
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    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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