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Is shared analyst coverage the source of all spillover effects?

Is shared analyst coverage the source of all spillover effects?

22-01-2020 | From the field
A wide range of spillover effects has been documented in the academic literature. This includes industry, geographic, and customer/supplier linkages. This paper 1 proposes a new spillover effect based on shared analyst coverage and shows that this is stronger and able to explain all these previously documented spillovers.
  • David Blitz
    David
    Blitz
    Head of Quant Research, Robeco

Based on these results the authors argue that spillover effects are a unified phenomenon that is rooted in shared analyst coverage. The idea behind the strategy is to calculate a signal for stock X by first identifying all analysts who follow stock X, and then taking the average past return on all the other stocks that are followed by the same analysts. 

The authors refer to this as ‘connected stock momentum’, with the connection arising from being covered by the same analyst. We intend to take a close look at these results, especially since we also make use of spillover variables. In particular, we wonder whether we can replicate the results in the paper, and, if so, if this factor can be used to enhance our existing models.

1Ali, U. and Hirshleifer, D., 2019, ‘Shared Analyst Coverage: Unifying Momentum Spillover Effects’, Journal of Financial Economics.

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