Tracking Jim Cramer: "Investing in Mad Money: Price and Style Effects"

From CXO Advisory Group:

Measuring Money Madness

Do the stock recommendations of guru Jim Cramer on CNBC's Mad Money move the market? Do they beat the market? In their October 2008 paper entitled "Investing in Mad Money: Price and Style Effects", flagged by a reader, Paul Bolster and Emery Trahan examine the market impacts and performances of buy and sell recommendations made by Jim Cramer on Mad Money. Using daily closing prices for a sample of 1,387 clear buy recommendations and 534 clear sell recommendations from YourMoneyWatch.com spanning July 28, 2005 through December 31, 2007, they conclude that:

• Jim Cramer’s stock recommendations impact share prices as short-lived effects that reverse for buys but persist for sells, as follows (see the first chart below):
  • The average abnormal return for buys is +3.6% for the 30 days leading up to the show and +1.9% on the day after the show, suggesting that Jim Cramer is reacting to prior information and momentum. These returns reverse by an average -2.0% over the next 30 days.
  • The average abnormal return for sells is -2.0% for the 30 days leading up to the show and -0.7% on the day after the show, suggesting again that Jim Cramer is reacting to prior information and momentum. Over the next 30 days underperformance extends by an average -2.6%.
• The aggregate cumulative return for Jim Cramer's recommendations over the the entire sample period before trading frictions is 31.8% (12.1% annualized), compared to 18.7% for the S&P 500 index (7.35% annualized)....MORE

CXO wraps up with:

...In summary, evidence suggests that "while Cramer may be entertaining and mesmerizing to many of his viewers, his aggregate or average stock recommendations are neither extraordinarily good nor unusually bad."

For related research, see Blog Synthesis: The Wisdom of Analysts, Experts and Gurus. See especially the closely related research summarized in our blog entries of 10/1/07 and 8/15/06. See also the review of Jim Cramer's qualitative commentary on the overall U.S. stock market and the analysis of his Mad Money "Lightning Round" reactions.