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Why Trading on News Stories Could Actually Be Profitable
by Zubin Jelveh
Mar 04, 2008
Mar 04, 2008
An interesting thing typically happens to a company's stock after it announces an earnings surprise, either positive or negative: over the next couple of months the stock tends to move in the same direction -- up for beating, and down for missing, analysts' expectations -- even though no new substantive information has come out.
The phenomenon, dubbed the Post-Earnings Announcement Drift, is a spur in the side of efficient market proponents since, theoretically, a stock price is supposed to convey all available information about a company at any given time. But the theorists don't quite have an explanation for the drift. Even the father of the Efficient Market Hypothesis, Eugene Fama, has voiced support for it.
And trading on the drift can be fruitful strategy with one recent study finding that a portfolio which took long-positions in good-news stocks earned abnormal annual returns of 7.5 percent.
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