Capitalizing on Analyst Earnings Estimates and Recommendation Announcements in Europe

Examining the market-adjusted cumulative abnormal returns associated with analyst earnings estimate and recommendation announcements in Europe, I find that both factors are significant when considered unconditionally and conditional on each other. When examining the strength of these factors during different market regime periods, however, I find that when the market or stock volatility for a given month is unusually high or dispersion between the market and stock volatilities is unusually low, the significance of both the EPS estimate and recommendation factors decrease or are non-existent. In addition, the least favorable quintile of securities – as measured by change in the earnings or recommendation factor – no longer exhibits the least favorable market-adjusted cumulative abnormal return. Since previous research has shown that volatility is somewhat persistent, modifying analyst models based on current market environments increases potential portfolio returns