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Abstract
Timing markets correctly is the key to profiting from Warren Buffet’s advice to “Be fearful when others are greedy and greedy when others are fearful.” But until now contrarian investors have had to follow their gut.
Authors Ivo Jansen and Andrei Nikiforov of Rutgers School of Business have developed a strategy based on earnings announcements—specifically, the reversals in extreme abnormal returns that often follow their release.
The price-reversal phenomenon has been documented in the literature, but Jansen and Nikiforov demonstrate that the reversal around the actual earnings announcement date is about 60% higher than around non-earnings announcement dates. Furthermore, a trading strategy that exploits this reversal was shown to be profitable in 40 of the last 42 years in their 1971–2012 sample period. This article offers insight into their analysis.
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