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Short-Horizon Reversal Around Earnings Announcements

Article Quantpedia
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Summary

The document describes a short-horizon reversal around earnings announcements among stocks with actively traded options. Instead of following the conventional post-earnings announcement drift, the strategy ranks companies due to report the next working day by abnormal return at their previous earnings announcement. It buys the lowest-return decile and sells the highest-return decile, equally weighting positions and holding them for two days.

The cited research reports that the highest prior-announcement-return group underperformed the lowest group by 1.29% at the next announcement, with a 0.73% spread using a prior earnings-surprise measure. The proposed explanation is that investors learned about historical underreaction and began overreacting. This brief summary does not establish whether the effect survives transaction costs or later periods. It also gives no reliable assessment of market exposure; the long-short portfolio’s crisis hedging potential remains uncertain.

Key ideas

  • The strategy focuses on stocks with active options markets that are scheduled to report earnings the next working day.
  • It buys stocks with the weakest abnormal return at their previous earnings announcement and shorts those with the strongest.
  • Positions are equally weighted and held for two days.
  • The cited study reports a reversal in subsequent announcement returns and attributes it to investor overreaction.
  • The source does not establish the strategy’s market-hedging properties or robustness after costs.

Tags

EquitiesEvent-drivenMean reversionMarket microstructure

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.