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

Content Provider	Springer Nature Link
Author	Zhang, Qi Cai, Charlie X. Keasey, Kevin
Copyright Year	2013
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.
Starting Page	605
Ending Page	625
Page Count	21
File Format	PDF
ISSN	0924865X
Journal	Review of Quantitative Finance and Accounting
Volume Number	43
Issue Number	3
e-ISSN	15737179
Language	English
Publisher	Springer US
Publisher Date	2013-06-18
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Post earnings announcement drift Trading strategy Efficient market hypothesis Simulation approach Transaction costs Finance/Investment/Banking Accounting/Auditing Econometrics Operations Research/Decision Theory
Content Type	Text
Resource Type	Article
Subject	Finance Accounting

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