Correspondence: Andrea S. Au, State Street Global Advisors, Boston, Massachusetts 02111, USA. Tel.: +1 617 664 9962; Fax: +1 617 664 6133; E-mail: andrea_au@ssga.com

¹is a quantitative research analyst at State Street Global Advisors' Advanced Research Center in Boston, Massachusetts.

Received 29 March 2006; Revised 29 March 2006.

Abstract

Examining market-adjusted cumulative abnormal returns following European analyst earnings estimate and recommendation announcements, 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 decreases or is non-existent. In addition, the least favourable quintile of securities — as measured by change in the earnings or recommendation factor — no longer exhibits the least favourable market-adjusted cumulative abnormal return. Since volatility is somewhat persistent, modifying analyst factor models based on recent market environments increases potential portfolio returns.