Trade against Jim Cramer

by on July 13, 2006 at 2:23 am in Economics | Permalink

We document market inefficiency in the
in the days following the buy recommendations of Jim Cramer, host of
the popular CNBC show Mad Money. The average cumulative abnormal
overnight return for the smallest quartile of recommended stocks is
5.19%, and these returns completely disappear within 12 trading days.
We also find that trading volume, buy-sell imbalance, and short sales
volume are all significantly higher than normal on the day following
Cramer’s recommendations. These findings allow us to test hypotheses
about the behavior of different types of traders. Finally, our GMM
estimates of the components of the bid-ask spread suggest that market
makers are aware of Cramer’s recommendations and anticipate the order
flow imbalance following Cramer’s recommendations.

Here is the paper.

1 Pat L July 13, 2006 at 9:31 am

I agree. If you really want excitement, forget poker. Instead, go short
a small cap stock that will certainly be heavily borrowed and have real
demand behind it. Your mission: avoid the short-squeeze and the margin
call and make a daring escape after the price reverses. And hope this isn’t
the one that doesn’t reverse.

Seriously, I watch the show occasionally, and I’ve noticed that ever since
the Symbol (SBL) debacle Cramer now takes a lot more trouble to explain
to people what happens when they all go out and buy a small cap on
his recommendation. I suspect that this opportunity is already gone. That
doesn’t mean the study doesn’t still have a lot of value of course.

Cramer’s easy to criticize on a number of grounds (he was just on TV a
couple of night’s ago saying that the business cycle really isn’t that
hard to grasp) but I’ve learned a lot from his writings. For instance, his
TSC column gave a spot on account of the LTCM crisis as it was unfolding.
As a blogger, I’d say he’s rivaled only by Tyler. Too bad his real time
columns are very expensive now.

2 Alex Ambroz July 13, 2006 at 11:05 am

I’ve been hoping someone would do an in-depth study of his recs. Fascinating guy, nevertheless.

3 mobile July 13, 2006 at 4:56 pm

There is also (unless enough money is already trading on it) a stat arb opportunity to buy on Cramer’s recommendations when he makes them on his radio show and to sell a few hours later when they are announced on television.

4 Dougroseville August 21, 2006 at 10:26 pm

Another good site for Cramer perspective is http://www.madmoneymachine.com
It started as a fan site… but is not necessarily anymore. Great podcast, too.

5 l July 12, 2007 at 12:20 am

I would like to massively short the phrase “spot on”.

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