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Do local analysts have an informational advantage in forecasting stock returns? Evidence from the German DAX30

  • T. Hendricks

    ()

  • B. Kempa

    ()

  • C. Pierdzioch

    ()

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    Utilizing data from the German DAX30 stock index, we investigate whether local analysts have an informational advantage in forecasting stock returns. We analyze whether banks’ buy and sell recommendations improve on the out-of-sample predictability of daily stock returns and the market-timing ability of investors who base their decisions on such recommendations. We find that, indeed, in a few cases German banks do have better stock-forecasting ability for daily stock returns than do foreign banks. However, the value added of bank recommendations is generally small and sensitive to the model-selection criterion used by an investor in setting up a forecasting model for stock returns. Copyright Swiss Society for Financial Market Research 2010

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    File URL: http://hdl.handle.net/10.1007/s11408-010-0129-7
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    Article provided by Springer in its journal Financial Markets and Portfolio Management.

    Volume (Year): 24 (2010)
    Issue (Month): 2 (June)
    Pages: 137-158

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    Handle: RePEc:kap:fmktpm:v:24:y:2010:i:2:p:137-158
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    1. Bjerring, James H & Lakonishok, Josef & Vermaelen, Theo, 1983. " Stock Prices and Financial Analysts' Recommendations," Journal of Finance, American Finance Association, vol. 38(1), pages 187-204, March.
    2. Pesaran, M. H. & Timmermann, A., 1996. "A Recursive Modelling Approach to Predicting UK Stock Returns'," Cambridge Working Papers in Economics 9625, Faculty of Economics, University of Cambridge.
    3. Leitch, Gordon & Tanner, J Ernest, 1991. "Economic Forecast Evaluation: Profits versus the Conventional Error Measures," American Economic Review, American Economic Association, vol. 81(3), pages 580-90, June.
    4. Christopher J. Malloy, 2005. "The Geography of Equity Analysis," Journal of Finance, American Finance Association, vol. 60(2), pages 719-755, 04.
    5. Pesaran, M Hashem & Timmermann, Allan, 1992. "A Simple Nonparametric Test of Predictive Performance," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 561-65, October.
    6. Lai, Sandy & Teo, Melvyn, 2008. "Home-Biased Analysts in Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 685-716, September.
    7. Cumby, Robert E. & Modest, David M., 1987. "Testing for market timing ability : A framework for forecast evaluation," Journal of Financial Economics, Elsevier, vol. 19(1), pages 169-189, September.
    8. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-89, June.
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