Analyst Forecast Revisions and the Idiosyncratic Volatility Anomaly in China
Summary
This study examines how analyst coverage and earnings forecast revisions relate to the negative association between idiosyncratic volatility (IVOL) and future stock returns in Chinese A-shares. It measures IVOL from residual volatility in a Fama–French three-factor model, sorts stocks into portfolios, and uses Fama–MacBeth regressions to compare coverage and forecast-revision groups. The sample covers A-shares from 2005 through 2014, excluding financial and specially treated firms.
The reported anomaly is stronger among stocks without analyst coverage. Among covered stocks, the pattern varies with revisions: it is weakest or may turn positive after upward revisions, weaker and shorter-lived after downward revisions, and remains pronounced when forecasts are unchanged. The analysis also considers limits to arbitrage and short selling, including China’s margin-trading pilot, and uses brokerage mergers and a market-wide coverage decline as external shocks. These checks support the interpretation that analysts can reduce information asymmetry, though the evidence comes from a historical Chinese market sample and does not establish that the relationships will persist in other markets or periods.
Key ideas
- The study finds a stronger negative IVOL-return relationship among Chinese stocks without analyst coverage.
- Among covered firms, the relationship varies with whether earnings forecasts are revised upward, downward, or left unchanged.
- Upward revisions are associated with a weaker, and sometimes positive, IVOL-return pattern.
- Limits to arbitrage and short selling help explain differences across revision groups but do not account for the entire pattern.
- The results are tested with coverage shocks and alternative controls, within a 2005–2014 A-share sample.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.