Investors’ Greed and Fear: An Event Study of Analyst Recommendations

Abstract

We investigate the effect of the skewness developed by the CBOE, called SKEW, on investors’ reactions to analyst recommendations. Our results show that the abnormal stock returns around analyst recommendation revisions are closely correlated with contemporaneous SKEW changes. Specifically, positive (negative) abnormal returns following analyst recommendation upgrades (downgrades) are stronger when daily SKEW increases (decreases). A potential explanation for this relation is that SKEW captures investors’ greed (excitement) in the stock market. Similar to the CBOE VIX, SKEW might act as another measure to reflect investors’ moods or sentiments. However, in contrast to VIX, which is usually used as investors’ fear gauge, SKEW is the opposite of investors’ fear, measuring investors’ consensus view of future positive news. Furthermore, we show that the magnitudes of abnormal returns associated with the change in SKEW are larger for the NASDAQ than for the NYSE on recommendation announcement days. This may manifest the different types of firms listed on these two stock exchanges.