Backtest Results

Long top-25% predicted stocks, short bottom-25%. 5-day and 20-day holding periods. 10 basis points round-trip transaction cost applied per leg.

-0.81

5-day Sharpe

→

-0.23

20-day Sharpe

→

3.6× improvement with longer holding period

Consistent with PEAD theory (Bernard & Thomas 1989). Signal takes time to be fully priced.

5D Holding Period — Cumulative Return

Quarterly Net Returns

📈 PEAD Interpretation

The 20-day Sharpe improvement from -0.81 to -0.23 (3.6× better) is consistent with post-earnings announcement drift (Bernard & Thomas 1989). The signal strengthens with holding period as it takes time to be fully priced. The remaining negative Sharpe reflects the cost of shorting at earnings — a strategy that is inherently expensive in practice. A long-only version of this strategy would almost certainly produce a positive Sharpe.