A study published in 2015 by two Stanford professors documented the rising impact that earnings announcements have on stock prices. The study encompassed every firm on the three major exchanges from 1971 to 2011 and analyzed returns following an earnings call. They found that earnings reports have a large impact on investor decisions and that impact has been rising at a growing rate since 2001.
"When they applied this approach to their sample of 700,000 quarterly earnings reports from 1971 through 2011, they found that price revisions were much larger in the days surrounding an announcement than at other times." This also meant that stock price volatility during announcement periods were much higher than non-announcement periods and that gap was growing.
The goal for this notebook was to expand upon the findings and see if the same trend upheld from 2011 - 2015 (the study stopped at 2011).
- Stock returns volatility is signifcantly higher around earnings announcements as compared to the few days before/after the announcement date. This volatility has the potential to drown out any potential drift from an earnings surprise as well as reduce sharpe by increasing the volatility-to-returns ratio.
- The same trend was found when comparing earnings announcements to the average daily volatility. The average vol of stock returns from 2011 to 2015 was ~.03 while the volatility on an earnings announcement date for those same securities was ~.07.
- To avoid the volatility that earnings announcements can introduce, traders are recommended to avoid these in their trading strategies. You can do that through Fetcher() or follow the framework I've published in this long-short trading strategy.
- See this dataset used in a Post-Earnings Announcement Drift Strategy, check out this algorithm using crowdsourced earnings estimates and the earnings calendar.
Are the results here similar to what you've seen in your backtesting? Comment below with your thoughts or feel free to shoot me a mail at [email protected].
For an in-depth webinar on earnings announcements. Watch our webinar with Dr. Jess Stauth, Quantopian's VP of Quant Strategy, and Anju Marempudi, CEO of EventVestor.
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