The profitability, costs and systematic risk of the post-earnings-announcement-drift trading strategy

Qi Zhang (), Charlie Cai () and Kevin Keasey ()

Review of Quantitative Finance and Accounting, 2014, vol. 43, issue 3, 605-625

Abstract: This paper re-examines the profitability of the post-earnings-announcement-drift (PEAD) trading strategy using a practical simulation approach that aligns with a fund manager’s investment perspective. It allows us to calculate the break-even transaction costs of following a PEAD strategy, and permits the explicit incorporation of transaction costs. Using US data from 1974 to 2007, we show that the traditional event-study method understates the risk and overstates the abnormal return of the PEAD strategy. Accounting for transaction costs in a practical simulation framework, we show there is no abnormal return (alpha) from the PEAD strategy in multi-factor asset pricing regression analyses. These results are robust to sub-period analyses and alternative transaction cost measures. The effects of intraday timing and information risk on the PEAD strategy are also explored. Overall, our study shows that the practical aspects of implementing the PEAD strategy are vitally important to evaluating the risk and return of the strategy. We provide a practical, analytical tool that can be directly adopted by fund managers to study the PEAD strategy with their institutional parameters of transaction costs and market timing. Copyright Springer Science+Business Media New York 2014

Keywords: Post earnings announcement drift; Trading strategy; Efficient market hypothesis; Simulation approach; Transaction costs; G11; G12; G14 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11156-013-0386-4 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:43:y:2014:i:3:p:605-625

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-013-0386-4

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().