Sleep-deprived traders react slower to company updates, study finds, as the clock moves forward, giving armchair investors a chance to profit from stock market movements did.
A study conducted by the University of Edinburgh found that just one hour of lost sleep can cause the market to undervalue affected companies by 36%.
Prior to a company's announcement, capital markets speculate on what will happen. When companies deviate from these forecasts, what is called an “earnings surprise” occurs.
How quickly and accurately traders react to these unpredictable events influences the pricing of a company's stock.
The study, published in the European Journal of Finance, found that when these events coincide with sleep deprivation, it takes longer than normal for markets to factor new information into stock market valuations. did.
This suggests that sleep-deprived traders misprice affected companies before reconsidering the information and pricing differently.
The time period between when a company issues an announcement and when it reaches the correct market valuation can be about 10 days, and smart investors can take advantage of that by buying undervalued stocks after the announcement and then There is still time to benefit from a revaluation of market prices, the study said.
The team behind the study says their findings highlight the important role that investors' cognitive abilities, particularly reasoning and processing speed, play in efficient market pricing.
To arrive at their findings, the researchers examined a large sample of earnings announcements made between 1993 and 2018 after the spring clock reset.
We compared these with the earnings forecast at the time. He then compared the unexpected earnings increase within the target group to a control group of similar companies that had announced their earnings just one week earlier.
Angelica Gonzalez, a senior lecturer in finance at the university, said the findings are “consistent with investors reconsidering and reversing their initial underreaction to unexpected earnings.”
“The apparent reversal as early as 10 days after the announcement suggests that the return pattern is explained by investors reconsidering their initial windfall as they regain their sleep, rather than by the arrival of new information.'' It suggests.”
An analysis of the study showed that investors who suffer from sleep deprivation may avoid making difficult investment decisions, such as trading based on earnings announcements.
This may correspond to a “limiting attention” effect, which has been shown to lead to an underreaction of announcements to earnings news and post-announcement fluctuations, the company said.
