Weekly Research Insights
Generating Alpha from Analysts | Protecting Against Inflation |Profiting from Macro Announcements
Many readers have asked for a richer discussion of useful and interesting papers, alongside the most recent research I cover in my weekly recap. So, I’m testing a new Thursday post: Weekly Research Insights. In this format, I’ll highlight a few noteworthy papers and discuss their key findings and practical takeaways. Let me know what you think.
In This Post:
Generating Alpha from Analysts
Protecting Against Inflation
Profiting from Macro Announcements
Generating Alpha from Analysts
Sell-side analysts play a key role in financial markets, providing price targets that investors often use for decision-making. Prior research has shown that while analyst recommendations influence stock prices, their forecasting accuracy is inconsistent, many tend to be overly optimistic, and price targets frequently need revisions. Most studies focus on earnings forecasts and recommendation changes rather than the investment value of price targets themselves.
A fresh paper by Cartea and Jin, “Alpha in Analysts”, takes a different approach by treating analysts as portfolio managers, constructing long-short portfolios based on their price targets to evaluate whether analysts generate persistent alpha. The authors introduce a “fund-of-analysts” framework, where capital is dynamically allocated to analysts with the strongest track records.
Key Findings
Dataset & Methodology
Uses IBES analyst price target data and CRSP stock return data from 1999 to 2024.
Constructs long-short portfolios for individual analysts: going long stocks with price targets above the current price and shorting those below.
Evaluates analysts’ alpha by comparing returns to an equally weighted long-only benchmark of the same stocks.
Main Results
On average, the typical analyst does not generate statistically significant alpha relative to a naive buy-and-hold strategy.
However, a subset of analysts exhibit persistent forecasting skills, particularly those with more than five years of experience.
A “fund-of-analysts” strategy, which dynamically allocates capital based on analyst performance predictions, outperforms both a naive buy-and-hold strategy and an equal-weighted analyst portfolio.
Analysts covering too many stocks tend to perform worse, while those with more concentrated coverage show greater skill persistence.
Investor Takeaways
The results suggest that investors should be highly selective when relying on analyst price targets. While the average analyst adds little value, a data-driven approach to identifying outperformers can generate alpha. Systematically tracking individual analysts’ accuracy over time and forming portfolios accordingly appears superior to blindly following consensus estimates. While this paper relies on linear regressions to estimate analysts’ expected skill, machine learning models, such as those explored by Cao et al. in “Can Machines Understand Human Skills? Insights from Analyst Selection”, could potentially further enhance investment performance.
This discussion is based on the following research papers. For full details, please refer to the original sources:
Cao, Sean, Norman Guo, Houping Xiao, and Baozhong Yang, 2024, Can Machines Understand Human Skills? Insights from Analyst Selection, SSRN Working Paper 4742174.
Cartea, Alvaro, and Qi Jin, 2025, Alpha in Analysts, SSRN Working Paper 5171848.
Protecting Against Inflation
Even though yesterday’s CPI numbers and today’s PPI print came in slightly lower than expected, several recent inflation surveys have ticked higher (e.g., New York Fed’s business survey) amid tariff concerns. Given this backdrop, it is valuable to revisit academic research on which investment strategies best protect against inflation.
Traditional wisdom suggests that stocks and bonds struggle during inflationary periods, while commodities and real assets may provide protection. However, past research has been fragmented, focusing mainly on individual asset classes rather than a comprehensive portfolio-level view. Neville et al., in their paper “The Best Strategies for Inflationary Times”, fill this gap by analyzing nearly a century of data across multiple countries to identify which investment approaches have historically performed best when inflation rises. Unlike many studies that focus on absolute inflation levels, this paper specifically examines inflationary shocks, periods when inflation is rising, to assess which strategies perform best when inflation unexpectedly increases.
Key Findings
Dataset & Methodology
The study examines data from 1926 to 2021 across the U.S., U.K., and Japan, identifying eight major inflationary periods.
Inflationary regimes are defined as periods when inflation exceeds 5% and continues accelerating, focusing on changes in inflation rather than just high inflation levels. This approach helps isolate investment strategies that respond to inflation surprises, rather than those that simply perform well in persistent high-inflation environments.
The paper evaluates both passive asset classes (stocks, bonds, commodities, real estate, collectibles) and active strategies (trend-following, equity factors, and alternative assets like crypto).
Main Results
Traditional assets perform poorly during inflationary shocks:
Equities deliver negative real returns, with no equity sector providing a strong inflation hedge, not even energy stocks.
Bonds decline sharply as inflation erodes their fixed cash flows.
A standard 60/40 stock-bond portfolio struggles, making it a weak hedge against inflation shocks.
Best-performing strategies when inflation accelerates:
Commodities outperform, particularly energy and industrial metals, making them the strongest hedge.
Trend-following strategies deliver strong returns, particularly in bonds and commodities, by dynamically adjusting positions to inflation-driven market trends.
Treasury Inflation-Protected Securities (TIPS) provide some protection, but their returns are lower than commodities.
Equity long-short factors offer some resilience but are not the best inflation hedge:
Cross-sectional stock momentum is the only factor that performs better during inflationary periods than in normal conditions, delivering +8% real returns on average during inflation surges.
Quality and value factors provide moderate resilience, but their performance does not improve during inflationary periods.
Low-volatility and size factors perform poorly, behaving similarly to broad equities.
Investor Takeaways
Investors relying on traditional stock-bond portfolios should prepare for significant underperformance during inflation shocks. Commodities and trend-following strategies have historically provided the strongest inflation protection, especially when inflation rises unexpectedly. This was evident in 2022 when both trend strategies and commodities delivered strong returns.
While equity long-short factors can provide some resilience, their effectiveness depends on the approach. The paper finds that most equity factors only provide modest inflation protection at best, except cross-sectional momentum, which outperforms during inflationary periods. However, a recent paper by Baltussen et al., “Investing in Deflation, Inflation, and Stagflation Regimes”, finds that most factor premiums remain stable across inflation regimes. This suggests that while factor strategies can play a role in inflation hedging, dynamic approaches like trend-following may offer stronger inflation protection, particularly when inflation accelerates unexpectedly.
This discussion is based on the following research papers. For full details, please refer to the original sources:
Baltussen, Guido, Laurens Swinkels, Bart van Vliet, and Pim van Vliet, 2023, Investing in Deflation, Inflation, and Stagflation Regimes, Financial Analyst Journal 79, 5-32. (SSRN Working Paper 4153468)
Neville, Henry, Teun Draaisma, Ben Funnell, Campbell R. Harvey, and Otto van Hemert, 2021, The Best Strategies for Inflationary Times, Journal of Portfolio Management 47, 8-37. (SSRN Working Paper 3813202)
Profiting from Macro Announcements
Macroeconomic announcements, such as employment data, inflation reports, and central bank decisions, provide crucial information about the economy and significantly impact stock prices. Previous research, particularly by Savor and Wilson (2014), found that a large portion of stock market risk premia is earned on days with major economic announcements. However, past studies focused on only a few types of announcements (such as CPI, PPI, employment, and interest rate decisions), potentially underestimating the full impact of macroeconomic news. The paper “US Equity Announcement Risk Premia” by Petrasek and Kukacka, expands the analysis by including 10 key macroeconomic announcements and investigates whether individual stocks' sensitivity to these announcements affects their future returns.
Key Findings
Dataset & Methodology
The study examines daily stock returns from the Russell 3000 index and about 4000 individual stocks from September 1987 to March 2023.
It uses macroeconomic announcement dates from official sources like the Federal Reserve and the US Bureau of Labor Statistics.
Stocks are grouped based on their sensitivity to announcement days and then sorted into portfolios.
Main Results
Market-Level Risk Premia:
On announcement days, the Russell 3000 index earns an average return of 8.3 basis points (bps), compared to just 1.4 bps on non-announcement days.
Expanding the set of macro announcements from 4 to 10 doubles the number of announcement days and reveals that 69% of cumulative equity risk premia is earned on these days.
Stock-Level Sensitivities:
Stocks that react strongly to announcements tend to earn higher future returns.
A portfolio that goes long high-sensitivity stocks and short low-sensitivity stocks earns an average return of 18 bps per month, with positive and significant alpha after controlling for Fama-French factors.
The strongest effects are observed for stocks sorted using a 60-month sensitivity lookback period.
Trading Strategies Based on Announcement Risk Premia:
A simple strategy that is long the market only on announcement days and earns the risk-free rate otherwise achieves a Sharpe ratio of 0.79 after costs.
A leveraged version of this strategy further boosts returns, but also increases volatility.
Investor Takeaways
This study confirms that macroeconomic announcement days drive a significant portion of equity returns and represent a risk premium, making them a key consideration for investors. Stocks with high sensitivity to these announcements tend to outperform over time, suggesting that announcement sensitivity can serve as both a trading signal and a factor in asset pricing models. One of the most influential macro announcements in the paper is FOMC meeting days, which tend to reward investors with an economically meaningful risk premium, something I tested and discussed in this article.
This discussion is based on the following research papers. For full details, please refer to the original sources:
Petrasek, Lukas, and Jiri Kukacka, 2024, US equity announcement risk premia, Review of Quantitative Finance and Accounting. (SSRN Working Paper 4978270)
Savor, G. Pavel, and Mungo Ivor Wilson, 2014, Asset pricing: A tale of two days, Journal of Financial Economics 113, 171-201. (SSRN Working Paper 2024422)
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Great article 🙏🏾