The Post Earnings Announcement Drift strategy exploits the following anomaly: Investors are very slow in reacting to current losses or profits because of behavioral bias effects. It is very profitable to capture gains following positive or negative earnings surprises in stocks at the earnings announcement date since the price move after the announcement is small relative to the full price move.
US stocks are ranked based on the standardized unexpected earnings and a long/short portfolio is formed by going long stocks with the highest positive earnings surprise and shorting highest negative earnings surprise.
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Investment Performance
Investment Return (?):
25%
Volatility (?):
14.5%
Sharpe Ratio:
1.72
Maximum Drawdown:
-12.45%
Investment’s Fundamental Concept:
Investors are very slow in reacting to current losses or profits because of behavioral bias effects. It is very profitable to capture gains following positive or negative earnings surprises in stocks at the earnings announcement date since the price move after the announcement is small relative to the full price move.
Investment’s Logic:
Investors are very slow in reacting to current losses or profits because of behavioral bias effects. It is very profitable to capture gains following positive or negative earnings surprises in stocks at the earnings announcement date since the price move after the announcement is small relative to the full price move.
The investment universe consists of stocks in NYSE, AMEX and NASDAQ. The standardized unexpected earnings are calculated for all stocks as the actual earnings minus the expected earnings divided by the earnings standard deviation.
Stocks are then divided into deciles based on SUE. The investor goes long stocks with highest positive earnings surprise (top decile) and short stocks with the highest negative earnings surprise (bottom decile).
Other Investment Strategy Characteristics:
Investment Type:
Value Investing
Investment Risk:
1/5 Very Low
Backtest Range:
30-40 years
Rebalancing period:
Daily
Investment Strategy Markets:
NYSE, AMEX and NASDAQ Stocks
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