**1. Introduction**

Prior literature has extensively investigated the market volatility expectations, captured by the implied volatility index (VIX).<sup>1</sup> VIX is developed by the Chicago Board Options Exchange (CBOE), measuring investors' fear in the US stock market [1, 2]. Later, the CBOE developed another index, SKEW, to estimate the tail risk of the S&P 500 returns that are not fully captured by VIX. While empirical evidence documents that asymmetry measures outperform volatility measures in predicting market returns, studies on SKEW are scant and it is inconclusive on whether SKEW could be a fear or greed indicator. Using a similar procedure for constructing the CBOE SKEW, Elyasiani et al. [7] propose an Italian SKEW (ITSKEW). They argue that SKEW (CBOE SKEW or ITSKEW) acts as a measure of market greed (excitement), and has a

<sup>1</sup> For example, see [1–6].

significant contemporaneous relation with returns.<sup>2</sup> However, Mora-Valencia et al. [8] explain the SKEW index as a fear indicator. Liu and Faff [9] question the usefulness of SKEW as an indicator of institutional anxiety. Our study complements prior research by further examining the effect of SKEW on stock returns around corporate events. Specifically, we investigate how the change in SKEW around analyst recommendations is related to announcement returns.

Analyst recommendation revisions contain useful information for investment decisions. For example, Stickel [10] shows that brokerage analyst recommendations have a strong effect on short-term stock prices. Womack [11] provides evidence that there exist significant discrepancies between pre-recommendation prices and postrecommendation values. Barber et al. [12] document that investors can earn abnormal returns, both gross and net of trading costs, by taking advantage of analyst recommendations. Jegadeesh and Kim [13] provide international evidence from G7 countries to show that stock prices react significantly to analyst recommendation revisions. Jegadeesh and Kim [14] further document a stronger market reaction to recommendation revisions when the new recommendations move away from the consensus. Loh and Stulz [15] show that in bad times, recommendation revisions have a larger impact on stock prices.

In general, the literature finds that around analyst recommendations, upgrades are related to higher abnormal stock returns, whereas downgrades are associated with lower abnormal stock returns (normally negative abnormal stock returns). Based on stocks listed on the NYSE, Kliger and Kudryavtsev [16] explore the interaction between abnormal stock returns and volatility expectations around recommendation revisions. They use the CBOE VIX to capture investors' market volatility expectations, which is also known as the investors' fear gauge [1, 2]. Their results show that VIX changes are highly correlated with investors'sentiment by reporting that positive (negative) abnormal stock returns are stronger when the daily VIX decreases (increases) for recommendation upgrades (downgrades). In the spirit of Kliger and Kudryavtsev [16], we examine the effect of SKEW on investors' reaction to analyst recommendation revisions. Skewness demonstrates one type of behavior regarding investors' attitude toward risks. For example, Han [17] shows that model-free implied skewness (MFIS) is associated with investor sentiment in which several investor sentiment proxies are applied [18–20]. Green and Hwang [21] document that initial public offerings (IPOs) with high expected skewness achieve greater first-day returns. This might be explained as individuals' affinity for lotteries, reflected by higher skewness.

We examine stocks listed on the NYSE and the NASDAQ separately because, on these two stock exchanges, the types of listed firms and investors are potentially different [22–25] and the market responses to news announcements are also different [26, 27].<sup>3</sup> We further contrast the effect of the market SKEW on investors' responses to analyst recommendation revisions on these two stock exchanges.

For both the NYSE and the NASDAQ, we show that the abnormal returns before announcement days (day �1) and on the announcement days (day 0) are significantly higher when SKEW increases (i.e., ΔSKEW>0) than when SKEW

<sup>2</sup> For instance, the change in SKEW during time *t* is significantly related to stock returns during the same period.

<sup>3</sup> Investors might have a different perception of stocks listed on the NYSE and NASDAQ. For example, most firms that trade on the NASDAQ are the young, high technology, and innovative firms.

#### *Investors' Greed and Fear: An Event Study of Analyst Recommendations DOI: http://dx.doi.org/10.5772/intechopen.107187*

decreases (i.e., ΔSKEW<0). For recommendation upgrades, the abnormal returns for these 2 days are generally positive<sup>4</sup> and are larger for ΔSKEW>0 than for ΔSKEW<0. Accordingly, for recommendation downgrades, the abnormal returns for these 2 days are generally negative<sup>5</sup> . Moreover, the magnitudes of abnormal returns for ΔSKEW>0 are significantly less than that for ΔSKEW<0. That is, abnormal returns are more negative on both days when SKEW decreases than SKEW increases. We argue that these results are analogous to investors' preference for stocks with lottery features [20, 28].

Furthermore, we show that on recommendation revision days (i.e., day 0), the magnitudes of corresponding abnormal returns are larger for stocks listed on the NASDAQ than those listed on the NYSE, that is, abnormal returns are more positive (negative) for upgrades (downgrades). This could be explained by the high volatility of high-tech stocks listed on the NASDAQ, which contributes to higher (lower) abnormal returns for upgrades (downgrades).

Overall, we observe a positive relationship between the changes in SKEW and abnormal returns around recommendation revisions. As such, we propose that SKEW is an indicator of investors' greed measure rather than a fear gauge. This is consistent with the study of Green and Hwang [21] and Elyasiani et al. [7].

Our study contributes to the literature on psychological bias and investors' decision-making in financial markets around news announcements. Through the corporate news events (i.e., analyst recommendations), we show that the CBOE SKEW index is useful in proxying investor sentiment. Investors prefer a higher skewness index, which represents greater investors' greed. These results are observed from stocks listed on both the NYSE and the NASDAQ. Moreover, investors might capture higher abnormal returns around recommendation upgrades and lose more around recommendation downgrades from stocks listed on the NASDAQ than those listed on the NYSE. In summary, this study provides significant implications for investors when making their investment decisions around news events in different stock exchanges.

The remainder of this paper proceeds as follows. Section 2 describes the data sample and reports the descriptive statistics. Section 3 presents the empirical results, and Section 4 concludes.
