Post Earnings Announcement Drift (PEAD)

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 Post Earnings Announcement Drift (PEAD)

Post Earnings Announcement Drift (PEAD) is a phenomenon that has been observed in the stock market. PEAD refers to the tendency of stock prices to continue to drift in the direction of an earnings surprise (either positive or negative) for a period of time after the earnings announcement.

For example, if a company reports higher than expected earnings, its stock price may increase immediately after the announcement. However, research has shown that the stock price may continue to increase for a period of time after the announcement, as more investors become aware of the positive earnings surprise and adjust their investment strategies accordingly.

Conversely, if a company reports lower-than-expected earnings, its stock price may initially drop. But the price may keep declining for a while as more investors learn about the negative news.

How to trade Post Earnings Announcement Drift (PEAD)?

In the strategy, we won't have to judge whether earning is good or bad. We let the market movement tell whether earning is good or bad and trade accordingly.

For example, Apple (AAPL) released 7 earnings reports between ‘2018-05-02’ and ‘2019-10-31’. As per PEAD, the sentiment persists for a few days after the earnings announcement. Thus, if the market closes higher on the earnings announcement day, a long position can be taken at the opening of the next trading day. Similarly, if the market closes lower on the earnings announcement day, a short position can be taken at the opening of the next trading day. 

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