Question

Provide a valid behavioural explanation for each of the following anomalies:

A) Post-earnings announcement drift.

B) Momentum.

Answer 1

A) Post earning announcement drift is the drift in stock prices after company announces a surprise earning for a period following earning announcement . Let's say a company announces an earning surprise as you'd expect, the stock immediately jump higher. And it will not stop there, the stock continue to drift in that direction for several weeks. The real effect of the announcement can be seen after one week. But the price will ultimately continue to drift for another 60 to 90 days after that.

B) Momentum: In financial terms momentum can be observed as moving of the price of an asset in a particular direction for a continuous period, it means if the price of assets are falling they will continue to fall and if the price of the assets are rising they will continue to rise further.

In the context of market momentum measures the sustainability of prices of stocks. It means stock prices will follow a trend whether it is upward trend or downward trend. Momentum indicators can be used to analysing the strength of the market and the issue price of stocks. They are helpful in technical analysis of market.

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