Effects of analyst target price revisions on short-term stock returns
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School of Business |
Master's thesis
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Authors
Date
2021
Department
Major/Subject
Mcode
Degree programme
Information and Service Management (ISM)
Language
en
Pages
65 + 10
Series
Abstract
This master’s thesis focuses on researching whether analyst target price revisions affect short-term stock returns in the Helsinki stock exchange and if so, would investors be able to benefit from this phenomenon by utilizing a target price -driven investment strategy. The returns of the strategy are benchmarked against the OMXH25GI index returns. From a theoretical standpoint, target price revisions should not affect stock prices according to the efficient market hypothesis, and it is also reviewed from this perspective whether the Helsinki stock exchange meets this condition. The results were achieved by utilizing statistical methods and returns calculations, while the validation was conducted through stock price forecasting. According to the results, target price revisions do affect stock prices in the short term, to an extent that an investment strategy based on them could be viable. By following the investment strategy presented here yielded aggregate returns of 31.1 % and 15.9 % by following stocks or estimators respectively, while the benchmark reached 9.8 % during the same time period. As the individual returns are relatively low due to the short holding period, the strategy is characterized by high volumes and rapid reactions to revisions. The returns of the investment strategy vary greatly on the stock- and target price issuer level, which is easily observable and thus exploitable, making it relatively easy to beat the benchmark, at least according to the results discovered here. Revisions also clearly affect other stock metrics as well, such as volume and number of trades, implying that market participants actively attempt to benefit from the reactions caused by them. According to the findings of the thesis, the theoretical efficiency of the Helsinki stock exchange is questionable, despite the data consisting of its most liquid stocks. From the perspective of a private investor, the most relevant finding was that target prices are inaccurate and often incorrect, but abnormal returns should be achievable by exploiting the reactions caused by revisions.Description
Thesis advisor
Kuosmanen, TimoKeywords
target price, efficient market hypothesis, analysts, revision