Strategy pattern · Event
Test a post-earnings drift strategy with the timing traps taken out.
Super Algo Kit grades the post-earnings drift strategy B. It holds a stock in the direction of a large earnings surprise for several weeks, on the idea that prices under-react to the news. It is one of the oldest documented anomalies, but later studies found it concentrated in small, illiquid stocks and largely gone in large ones. The kit has not tested it.
strategy facts
Post-earnings-announcement drift
- Family
- Event: reactions to scheduled earnings news
- Markets
- Equities: long the largest positive surprises, optionally short the largest negative ones
- Timeframe
- Daily bars, holding 20 to 60 trading days
- Evidence grade
- B: long documented, with clear decay and dependence on illiquid names
- Status
- Literature: published, untested by the kit
- Data needed
- Point-in-time announcement times, pre-release consensus, prices with corporate actions and delistings, borrow
- Paper minimum
- The kit's default for low-frequency strategies: at least 60 days or 20 trades on paper
From the kit's own card. Not investment advice.
Paper first
Test it before you trade it.
Super Algo Kit runs inside the coding agent you already use. It interviews you, writes the spec with pass marks set first, then builds, backtests and paper-tests. Real money starts only when you type the authorize command.
The plan, step by step
Tick them off as you go.
What is post-earnings announcement drift?
After a company reports earnings far above or below expectations, its price has historically kept drifting in the surprise's direction for weeks. The usual reading is that prices under-react to earnings news at first. It is one of the oldest documented anomalies, studied since 1968.
The surprise is measured against the consensus known before the release, or by the stock's abnormal move on the announcement day. A strategy buys the largest positive surprises and may short the largest negative ones.
Post-earnings drift rules in plain words
Here is the outline, in summary. Each threshold is declared before testing.
- Record each announcement with its exact time, before the open or after the close.
- Measure the surprise against pre-release consensus, or the announcement-day move.
- Enter at the first open after the news becomes public.
- Hold the largest surprises for 20 to 60 trading days.
- Filter for liquidity and price.
What the evidence says, and where it breaks
Grade B reflects a long record with clear decay. Later work found the drift concentrated in small, illiquid stocks, where spreads, impact and borrow costs are highest. A 2022 study argued it has largely disappeared in large stocks.
Backtests also go wrong on timing. An after-close announcement assigned to that day's close lets the test trade before the news was public. Consensus data revised later makes surprises look more predictive than they were.
How Super Algo Kit tests a post-earnings drift bot
Pass marks are declared first, and every parameter is a logged trial. The leakage audit checks announcement timestamps, and consensus must be point-in-time. Recent years are tested separately, then results are split by size and liquidity.
The report gives the break-even cost multiple: how far costs can rise before the result after costs reaches zero. Small-cap versions often fail it. Walk-forward checks and the deflated Sharpe ratio come before a paper run.
Before you rely on it
Where it fails.
- Timing look-ahead: an after-close report assigned to that day's close trades before the news.
- Consensus revised after the fact makes surprises look more predictive.
- Decay: the drift is weaker in recent decades and in large, liquid stocks.
- What remains sits in names with the highest spreads, impact and borrow costs.
- Earnings seasons cluster events, so positions are correlated, not independent.
FAQ
Post-earnings drift: questions.
What is post-earnings announcement drift (PEAD)?
Post-earnings announcement drift is the tendency for a stock to keep moving in the direction of an earnings surprise for weeks after the announcement. Super Algo Kit grades the pattern B. It is long documented, but it has decayed and now sits mostly in small, illiquid stocks.
Does post-earnings drift still exist?
The evidence on post-earnings drift is mixed. A 2022 study argued the drift has largely disappeared in large stocks, and what remains sits in names with high trading costs. Super Algo Kit tests recent years separately and reports the break-even cost multiple.
What data do I need to backtest post-earnings drift?
You need announcement dates and exact times, plus consensus estimates as they stood before each release. Prices must include corporate actions and delistings, from a point-in-time universe. Super Algo Kit also needs borrow availability and fees if you short.
Why do earnings backtests often look better than reality?
An after-close announcement assigned to that day's close lets an earnings backtest trade before the news was public. Revised consensus data has a similar effect. Super Algo Kit's leakage audit checks announcement timestamps before any result is trusted.
How long is a post-earnings drift paper run?
Holding periods of 20 to 60 trading days make post-earnings drift a low-frequency strategy. Super Algo Kit's default paper minimum for low-frequency strategies is at least 60 days or 20 trades. Live trading starts only when you type the authorize command.
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- Ball and Brown (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research.
- Bernard and Thomas (1989). Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium? Journal of Accounting Research.
- Chordia, Goyal, Sadka, Sadka and Shivakumar (2009). Liquidity and the Post-Earnings-Announcement Drift. Financial Analysts Journal.
- Martineau (2022). Rest in Peace Post-Earnings Announcement Drift. Critical Finance Review 11(3-4).
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Super Algo Kit is development software. It is not investment advice, a signal service or a promise of performance. Trading involves substantial risk, including the loss of all capital you trade with.