A Trading Strategy Based On Pead Effect In A-share Market

Various researches have been conducted to study the relationship betweenearnings announcement and abnormal return in A-share market. This one divides stocksinto preliminary group and non-preliminary group according to whether they havepreliminary announcement, and then forms ten portfolios, called SUE portfolios, basedon stocks’ unexpected level of earnings for both preliminary group andnon-preliminary group to help study the relation in detail.The key empirical result established in this paper is that preliminaryannouncement is more closely related with abnormal return than non-preliminaryannouncement, and indicates more attention should be paid to the preliminary groupwhen looking for abnormal return.For preliminary group, the relationship between earnings announcement andstock price is notably positive: good information will lead to positive abnormal returnsand bad information lead to negative ones. While for the non-preliminary group, therelationship between earnings announcement and stock price is not that obvious. Andfor the same SUE decile, the one from the preliminary group get more abnormalreturn than the one from non-preliminary group. Market efficiency for preliminaryearnings announcement is also lower than that of non-preliminary earningsannouncement, leaving more profit opportunity for investors.Then a trading strategy has been developed based on the findings in previousempirical part, the basic principle is to pick stocks with high unexpected earnings fromthe preliminary group. Back-test ofthe past tenyears’data showsthis strategycan bringannualized return of25%, and other tests have proved it a strategy good enough forinstitutional investors to implement.