January 18, 2011
We are two US trained accounting professors now at the University of Cyprus and have just completed a research project examining whether investment banks exploit their foreknowledge of a subsequent recommendation change for prop trading purposes. We find that this is the case both in the pre and post Global Settlement periods. In the post Global Settlement period, this behavior is only observed when volatility is high. We also find some evidence that banks trade against their own recommendations.
The paper will be submitted soon to a US journal,
Irene Karamanou, P h.D.