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An Empirical Study on the Stock Price Reaction to Earnings Announcements using the Stochastic Discount Factor Approach

  • Journal of Insurance and Finance
  • 2015, 26(2), pp.59-84
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

ChanShik Jung 1 Soonho Kim 2

1동아대학교
2부경대학교

Accredited

ABSTRACT

This paper studies risk-adjusted returns of standardized unexpected earnings(SUE) portfolios using stochastic discount factor approach to investigate what drives the post-earnings announcement drift(PEAD). The SUE hedge portfolio shows monthly return of 0.85% before risk adjustment. After risk adjustment by stochastic discount factor approach, the SUE hedge portfolio gives monthly return of 0.36%. It means that 57.6% of PEAD can be attributed to risk premium. However, residual monthly return of 0.36% after risk adjustment is significant at the 10% level, which indicates that PEAD can also be interpreted as delayed response.

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