Volatility expectations and the reaction to analyst recommendations

Doron Kliger, Andrey Kudryavtsev

Research output: Contribution to journalArticlepeer-review


Our study explores the effect of market volatility expectations, captured by the implied volatility index (VIX), aka "investors' fear gauge," on investors' reactions to analyst recommendation revisions. We find that positive (negative) excess returns following recommendation upgrades (downgrades) are stronger when accompanied by daily VIX decreases (increases). A rational explanation for the effect may be due to VIX serving as an indicator of future economic conditions. Noting, however, that the VIX effect is detected on excess daily stock returns is suggestive that the results are driven by more than mere changes in investors' expectations of economic fundamentals. We suggest, therefore, that investors' mood, as reflected by VIX changes, mediates their reactions to analyst recommendation revisions, to wit, investors in good (bad) mood perceive positive (negative) future financial outcomes as more probable (whether indicative of future occurrences or not) and react more strongly to analyst recommendation upgrades (downgrades).

Original languageEnglish
Pages (from-to)1-6
Number of pages6
JournalJournal of Economic Psychology
StatePublished - Aug 2013

Bibliographical note

Funding Information:
The financial support of the Zimmerman Foundation for the study of Banking and Finance at the University of Haifa is gratefully acknowledged.


  • Analyst recommendation revisions
  • Behavioral finance
  • Investors' fear gauge
  • Market sentiment
  • VIX

ASJC Scopus subject areas

  • Applied Psychology
  • Sociology and Political Science
  • Economics and Econometrics


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