Asset Returns and Investment Banking Analysts' Recommendations

This research concerns the analysis of the investment banking analysts' recommendations and their importance on the Russian stock market. We admit that the value of the analysts' recommendations is still questioned and set the aim to work out their value for the Russian stock market. We analyze the pricing models without and with recommendations for the different sectors of the Russian economy and arrive to the conclusion that recommendations are significant for each industry and have a positive influence on stock price formation which confirms the fact that investors take into account analysts’ opinion on how stocks will move. Moreover, we conduct the cross-section analysis with recommendations and obtained the higher power of the models versus the ones without recommendations. Then we aggregate analysts’ recommendations and build models of formation of recommendations for each industry. Apart from the standard methods of portfolio construction, the paper proposes a new method of portfolio construction, including recommendations. Indeed, this method leads the portfolio with a higher risked-adjusted return. Thus, this confirms that investors can create value, following recommendations.