Quantpedia is The Encyclopedia of Quantitative Trading Strategies
We've already analyzed tens of thousands of financial research papers and identified more than 1000 attractive trading systems together with thundreds of related academic papers.
- Unlock Screener & 300+ Advanced Charts
- Browse 1000+ uncommon trading strategy ideas
- Get new strategies on bi-weekly basis
- Explore 2000+ academic research papers
- View 800+ out-of-sample backtests
- Design multi-factor multi-asset portfolios
Earnings announcement period is an essential time for many equity traders. It is time when most of the stocks move with higher volatility, which offers the more significant potential for profit. We present an interesting research paper that helps to increase the odds of correctly pick outperforming (and underperforming) stocks during this period. The article shows that the timing of stock repurchase announcement and secondary equity offering (SEO) announcement is an important predictor of performance during earnings announcement. Managers have the ability to time stock repurchase and SEO announcements. Academic research shows managers choose to buyback stocks when they expect good earnings announcement, and they prefer to execute SEO before bad earnings. Therefore investors could look for these indicators and build long-only (with the help of information from stock repurchase announcements) of long-short (short leg with help from SEO announcement date) trading portfolio with attractive characteristics. We insert the long-only description into our database (as it is easier to build and trade). Still, we recommend also reviewing the long-short version of this strategy described in the source academic paper.
Fundamental reason
The academic paper states that it is generally accepted that managers have more information about the firm than investors. Given this information asymmetry, managers can make informed decisions about corporate actions such as equity offerings or repurchases. The announcement of stock repurchase or secondary equity offering is voluntary and can be easily moved by a few weeks or months. Therefore the timing of SEO or repurchase announcement before earnings announcement could be perceived as important information about the future performance of stock during the earnings announcement period.
Get Premium Strategy Ideas & Pro Reporting
- Unlock Screener & 300+ Advanced Charts
- Browse 1000+ unique strategies
- Get new strategies on bi-weekly basis
- Explore 2000+ academic research papers
- View 800+ out-of-sample backtests
- Design multi-factor multi-asset portfolios
Keywords
Market Factors
Confidence in Anomaly's Validity
Period of Rebalancing
Number of Traded Instruments
Notes to Number of Traded Instruments
Complexity Evaluation
Financial instruments
Backtest period from source paper
Indicative Performance
Notes to Indicative Performance
Estimated Volatility
Notes to Estimated Volatility
Notes to Maximum drawdown
Sharpe Ratio
Regions
Simple trading strategy
The investment universe consists of stocks from NYSE/AMEX/Nasdaq (no ADRs, CEFs or REITs), bottom 25% of firms by market cap are dropped. Each quarter, the investor looks for companies that announce a stock repurchase program (with announced buyback for at least 5% of outstanding stocks) during days -30 to -15 before the earnings announcement date for each company. Investor goes long stocks with announced buybacks during days -10 to +15 around an earnings announcement. The portfolio is equally weighted and rebalanced daily.
Hedge for stocks during bear markets
No – The selected strategy is designed as a long-only; therefore, it can't be used as a hedge against market drops as a lot of strategy's performance comes from equity market premium (as the investor holds equities, therefore, his correlation to the broad equity market is very very high).
Out-of-sample strategy's implementation/validation in QuantConnect's framework(chart, statistics & code)
Source paper
Amini, Singal: Are Earnings Predictable?
Abstract: If managers use their superior information to time a firm’s corporate actions, it is likely that equity issuance will precede bad earnings while stock repurchase announcements will precede good earnings. Consistent with this conjecture, we find evidence of market timing and earnings predictability. The market reaction to earnings following repurchase announcements is statistically and economically significantly higher by 4.56% than earnings following SEO pricings over a 25 trading day window (-10, 15).