​Actively Managing An Equity Portfolio During Earnings Season

Even if it is very difficult to admit for our Equity Analysts friends, all the empirical data available show that it is impossible to predict the market reaction following an earnings release. Thus, we need to distinguish the fundamental aspect (Turnover, EBITDA), which is less predictable, from the price signal aspect, which, even looking at fundamental data already released, remains impossible to predict. Empirically, the specific move, linked to earnings release, is on average null, on a statistical perspective, its distribution exhibiting a very high ‘leptokurticity’. Therefore, for an asset manager whose aim is to optimize his Sharpe ratio, it is not worthwhile to keep the positions over the earnings (assuming transaction fees and liquidity fees to be marginal).