Behavioural finance Chatgpt
PEAD explanation
Definition: Post-Earnings Announcement Drift (PEAD) is the tendency of a
stock's price to drift in the direction of an earnings surprise for an extended
period following the earnings announcement. This phenomenon suggests that
markets are not perfectly efficient, as prices fail to fully incorporate earnings
information immediately.
PEAD occurs because investors either underreact to earnings news or require
time to process and incorporate the information into prices.
Efficient Market Hypothesis (EMH): According to EMH, all available
information, including earnings announcements, should be instantaneously
reflected in a stock's price. PEAD contradicts this idea, as the market reacts
sluggishly to earnings surprises, resulting in a drift over days, weeks, or even
months.
Behavioral Explanation: Behavioral biases such as overconfidence,
conservatism bias (underreaction), and limited attention contribute to the
delayed reaction. Investors may underestimate the persistence or implications of
unexpected earnings changes.
Positive earnings surprises (actual earnings higher than expected) lead to
upward price drifts.
Negative earnings surprises (actual earnings lower than expected) result in
downward price drifts.
Ball & Brown: Analyzed the unexpected earnings (UE) for a sample of firms and
their stock price movements + Measured UE as the difference between actual
earnings and expected earnings based on prior trends.
Findings: earnings surprises were significantly correlated with abnormal
stock returns ; the stock price reaction occurred not only immediately upon
announcement but continued for months afterward, leading to a sustained
drift.
A portion of the information embedded in earnings announcements was
absorbed slowly by the market, resulting in PEAD
Foster, Olsen & Shevlin: extend the findings of Ball & Brown by analyzing the
timing and magnitude of the drift. Focused as well on forecast errors. -> grouped
stocks based on the magnitude of their earnings surprises into deciles ; tracked
CAR for each decile over time.
Findings: Stocks in the top decile (largest positive surprises) continued to
outperform for up to 60 days post-announcement ; Stocks in the bottom
decile (largest negative surprises) exhibited downward drifts for the same
period,
The persistence of PEAD indicates inefficiencies in how the market
processes new information, supporting the idea of underreaction.
Bernard & Thomas: examined whether PEAD could be rationalized by risk
factors or is purely a market inefficiency, using Standard Unexpected Earnings
(SUE) = a measure that normalizes earnings surprises based on historical
variability. They classified stocks into portfolios based on SEU and examined the
post-announcement returns for these portfolios over a 90-day period.
, Findings: the drift persisted for 90 days, with the strongest effect for high
SUE portfolios ; Risk-adjusted returns failed to explain the drift, implicating
behavioral factors like underreaction
PEAD was not driven by risk compensation but by cognitive biases and
slow information diffusion.
Abarbanell & Bernard: investigated whether fundamental analysis could
anticipate PEAD and its investment implications <=> examined whether earnings
could predict future performance
Findings: earnings surprises are often persistent—unexpected earnings in
one quarter predict unexpected earnings in subsequent quarters ;
Investors who exploited PEAD by identifying high-persistence stocks could
achieve abnormal returns.
E.g. a company with a history of exceeding earnings expectations is likely
to do so again. By investing early, investors could capitalize on the drift
Longevity of the Drift: influenced by
Market size: small firms exhibit longer and stronger drifts
Earnings Surprise Magnitude: larger surprised tend to have more
pronounced and longer-lasting drifts
Market conditions: during periods of market stress or high uncertainty, the
drift may extend further as investors delay reactions.
Chatgpt part 1, chapter 1
Mathematical Preliminaries:
Sets: introduces the mathematical foundations of set theory, crucial for
understanding choice theory.
Set Definition: A collection of distinct elements, e.g., A={a1,a2,a3}.
Subset: A smaller collection within a set, e.g., A′={a1,a2}⊂A.
Intersection: Common elements between two sets, A∩B = {x : x ∈ A and x ∈ B}
Union: All unique elements from two sets combined, A∪B = {x : x ∈ A or x ∈ B}
Example: A={a1,a2,a3} and B={b1,b2,a3}.
A∩B={a3}: Common elements.
A∪B={a1,a2,a3,b1,b2}: Combined elements
Cartesian product: A×B={(a,b):a∈A and b∈B} -> pairs every element from A with
every element from B. For example:
If A={a1,a2} and B={b1,b2}: -> A×B={(a1,b1),(a2,b1),(a1,b2),(a2,b2)} , in
general: A×B≠B×A
This understanding of Cartesian products sets the stage for discussing
relations between elements, which is essential for preference relations
Relation xRy: introduces binary relations, which are subsets of the Cartesian
product of a set with itself.
Binary Relation: A subset R⊆X×X, where X is a non-empty set. If (x,y)∈R(x, y),
we say xRy, meaning x is related to y.
Example: If X={x1,x2,x3}, then X×X has 32=9 elements. Define R={(x1,x1),
(x2,x2),(x3,x3)}, which represents a relation where each element relates to itself
(reflexivity).
PEAD explanation
Definition: Post-Earnings Announcement Drift (PEAD) is the tendency of a
stock's price to drift in the direction of an earnings surprise for an extended
period following the earnings announcement. This phenomenon suggests that
markets are not perfectly efficient, as prices fail to fully incorporate earnings
information immediately.
PEAD occurs because investors either underreact to earnings news or require
time to process and incorporate the information into prices.
Efficient Market Hypothesis (EMH): According to EMH, all available
information, including earnings announcements, should be instantaneously
reflected in a stock's price. PEAD contradicts this idea, as the market reacts
sluggishly to earnings surprises, resulting in a drift over days, weeks, or even
months.
Behavioral Explanation: Behavioral biases such as overconfidence,
conservatism bias (underreaction), and limited attention contribute to the
delayed reaction. Investors may underestimate the persistence or implications of
unexpected earnings changes.
Positive earnings surprises (actual earnings higher than expected) lead to
upward price drifts.
Negative earnings surprises (actual earnings lower than expected) result in
downward price drifts.
Ball & Brown: Analyzed the unexpected earnings (UE) for a sample of firms and
their stock price movements + Measured UE as the difference between actual
earnings and expected earnings based on prior trends.
Findings: earnings surprises were significantly correlated with abnormal
stock returns ; the stock price reaction occurred not only immediately upon
announcement but continued for months afterward, leading to a sustained
drift.
A portion of the information embedded in earnings announcements was
absorbed slowly by the market, resulting in PEAD
Foster, Olsen & Shevlin: extend the findings of Ball & Brown by analyzing the
timing and magnitude of the drift. Focused as well on forecast errors. -> grouped
stocks based on the magnitude of their earnings surprises into deciles ; tracked
CAR for each decile over time.
Findings: Stocks in the top decile (largest positive surprises) continued to
outperform for up to 60 days post-announcement ; Stocks in the bottom
decile (largest negative surprises) exhibited downward drifts for the same
period,
The persistence of PEAD indicates inefficiencies in how the market
processes new information, supporting the idea of underreaction.
Bernard & Thomas: examined whether PEAD could be rationalized by risk
factors or is purely a market inefficiency, using Standard Unexpected Earnings
(SUE) = a measure that normalizes earnings surprises based on historical
variability. They classified stocks into portfolios based on SEU and examined the
post-announcement returns for these portfolios over a 90-day period.
, Findings: the drift persisted for 90 days, with the strongest effect for high
SUE portfolios ; Risk-adjusted returns failed to explain the drift, implicating
behavioral factors like underreaction
PEAD was not driven by risk compensation but by cognitive biases and
slow information diffusion.
Abarbanell & Bernard: investigated whether fundamental analysis could
anticipate PEAD and its investment implications <=> examined whether earnings
could predict future performance
Findings: earnings surprises are often persistent—unexpected earnings in
one quarter predict unexpected earnings in subsequent quarters ;
Investors who exploited PEAD by identifying high-persistence stocks could
achieve abnormal returns.
E.g. a company with a history of exceeding earnings expectations is likely
to do so again. By investing early, investors could capitalize on the drift
Longevity of the Drift: influenced by
Market size: small firms exhibit longer and stronger drifts
Earnings Surprise Magnitude: larger surprised tend to have more
pronounced and longer-lasting drifts
Market conditions: during periods of market stress or high uncertainty, the
drift may extend further as investors delay reactions.
Chatgpt part 1, chapter 1
Mathematical Preliminaries:
Sets: introduces the mathematical foundations of set theory, crucial for
understanding choice theory.
Set Definition: A collection of distinct elements, e.g., A={a1,a2,a3}.
Subset: A smaller collection within a set, e.g., A′={a1,a2}⊂A.
Intersection: Common elements between two sets, A∩B = {x : x ∈ A and x ∈ B}
Union: All unique elements from two sets combined, A∪B = {x : x ∈ A or x ∈ B}
Example: A={a1,a2,a3} and B={b1,b2,a3}.
A∩B={a3}: Common elements.
A∪B={a1,a2,a3,b1,b2}: Combined elements
Cartesian product: A×B={(a,b):a∈A and b∈B} -> pairs every element from A with
every element from B. For example:
If A={a1,a2} and B={b1,b2}: -> A×B={(a1,b1),(a2,b1),(a1,b2),(a2,b2)} , in
general: A×B≠B×A
This understanding of Cartesian products sets the stage for discussing
relations between elements, which is essential for preference relations
Relation xRy: introduces binary relations, which are subsets of the Cartesian
product of a set with itself.
Binary Relation: A subset R⊆X×X, where X is a non-empty set. If (x,y)∈R(x, y),
we say xRy, meaning x is related to y.
Example: If X={x1,x2,x3}, then X×X has 32=9 elements. Define R={(x1,x1),
(x2,x2),(x3,x3)}, which represents a relation where each element relates to itself
(reflexivity).
