PEAD and short term mean reversion

Discussion in 'Trading' started by markd01, May 26, 2011.

  1. markd01


    Does anyone have any quantified data on PEAD (Post Earnings Announcement Drift) in the context of short term mean reversion?
    Most of the PEAD research I read about talks about a drift lasting several weeks/months in the direction of the earnings surprise, while my mean reversion swing trades don't last longer than 4 days.

    My theory is that if a stock traded at $10 yesterday, today before open it had negative earnings and/or guidance, it will sell off to say $8 in the next 1 or 2 days. If one enters it at $8 on day number 3, there is a chance of it getting back up to $9 by day 7, but later on PEAD may take over and it will drift lower for weeks or even months.

    The questions I'm trying to answer are:
    a) is there any room for short term mean reversion in the days following earnings announcement or earnings guidance
    b) if negative earnings announcement or earnings guidance occurs, does the stock price get really oversold in the next 1-2 days, reverts to the mean, and only then starts a more prolonged drift lower
    c) can one always tell if the news is perceived as negative or positive.. should any stock with any earnings announcement or earnings guidance be excluded and for how many days before entry?