The Quantpedia Trading Strategy Series has so far examined three different earnings based trading strategies. As an example of what can be done with the research you find there or anywhere else in the community, Matthew Lee created 3 different variations.
Here's a quick summary of the strategies used in this thread:
- Reversals During Earnings Announcements by Nathan Wolfe - Eric C. So of MIT and Sean Wang of UNC show that abnormal short-term returns reversals take place during the period immediately surrounding earnings announcements. They surmise that this reversal results from market makers' response to a temporary demand imbalance, as they temporarily shift the stock's price to ride out the imbalance. (Algorithm + Notebook + Tearsheet)
- Are Earnings Predictable with Buyback Announcements? by Seong Lee - The announcement of stock repurchase or secondary equity offering is voluntary and can be easily moved by a few weeks or months. Therefore the timing of SEO or repurchase announcement before earnings announcement could be perceived as important information about future performance of stock during earnings announcement period. (Algorithm + Notebook)
- Reversals in the PEAD by Matthew Lee - In his white paper "Overreacting to a History of Underreaction", Milian explores the possibility that well known cross sectional anomalies can reverse over time. Specifically, he investigates the reversal of the PEAD effect. He finds that contrary to previous research, stocks with the most negative previous earnings surprise actually exhibit the most positive returns following the subsequent earnings announcement. (Algorithm + Notebook)
You can find the variations attached to this thread. Copy, clone, and enjoy!
PEAD Reversal + 5 day returns Reversals Rolling Rebalance
1. Each day, run a pipeline for stocks, selecting q500 stocks in the top decile of previous earnings surprise (shorts), and lowest decile of previous earnings surprise (longs), and the top quintile of returns, and q1500 stocks in the top decile of 5 day returns (shorts) and lowest decile of 5 day returns (longs).
2. Increment the hold times for each stock held in the portfolio, only keeping stocks for which the hold time <
3. Open new long/short positions for stocks generated by the pipeline, equally distributing the portfolio between all long/shorts currently held
4. Close positions for stocks which have been held for >
This algorithm is an implementation of combined strategy using this paper on the PEAD Reversal in combination with this paper on news driven returns reversals, leveraging the PEAD reversal found after earnings announcements, along with reversals based on 5 day return lookbacks.
*Note that this algorithm uses the
LagESurp indicator, rather than the stronger
LagEaRet indicator for Earnings Surprise
|Returns||1 Month||3 Month||6 Month||12 Month|
|Alpha||1 Month||3 Month||6 Month||12 Month|
|Beta||1 Month||3 Month||6 Month||12 Month|
|Sharpe||1 Month||3 Month||6 Month||12 Month|
|Sortino||1 Month||3 Month||6 Month||12 Month|
|Volatility||1 Month||3 Month||6 Month||12 Month|
|Max Drawdown||1 Month||3 Month||6 Month||12 Month|