Hostname: page-component-84b7d79bbc-x5cpj Total loading time: 0 Render date: 2024-07-30T10:14:18.087Z Has data issue: false hasContentIssue false
  • English
  • Français

A Market Microstructure Explanation for Predictable Variations in Stock Returns following Large Price Changes

Published online by Cambridge University Press:  06 April 2009

Jinwoo Park
Jinwoo Park
Affiliation:
College of Business and Economics, Hankuk University of Foreign Studies, Dongdaemun-Gu, Imun-Dong, Seoul 130–791, Republic of Korea.
Get access Rights & Permissions [Opens in a new window]

Abstract

Prior empirical evidence of predictable variations in stock returns following large price changes is found to be, at least in part, driven by the sample selection bias arising from the systematic movement of closing transaction prices within the bid-ask spread. By using the average of the bid-ask prices in the sample selection process, the price reversal on the day following the events (day +1) disappears. For a short-run period after day +1, however, systematic abnormal return patterns are still observed. These short-run price reversals persist even after controlling for the influence of systematic trading patterns around the events. However, investigation of contrarian investment profits from these short-run price reversals shows that the average abnormal returns are not large enough to cover the transaction price movement between the bid and ask prices.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 2 , June 1995 , pp. 241 - 256
Copyright
Copyright © School of Business Administration, University of Washington 1995

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Atkins, A. B., and Dyl, E. A.. “Price Reversals, Bid-Ask Spreads, and Market Efficiency.” Journal of Financial and Quantitative Analysis, 25 (12 1990), 535–547.CrossRefGoogle Scholar
Blume, M. E., and Stambaugh, R. F.. “Biases in Computed Returns: An Application to the Size Effect.” Journal of Financial Economics, 12 (11 1983), 387–404.CrossRefGoogle Scholar
Bremer, M. A., and Sweeney, R. J.. “The Reversal of Large Stock-Price Decreases.” Journal of Finance, 46 (06 1991), 747–754.Google Scholar
Brown, K. C., and Harlow, W. V.. “Market Overreaction: Magnitude and Intensity.” Journal of Portfolio Management, 14 (Winter 1988), 6–13.CrossRefGoogle Scholar
Brown, K. C.; Harlow, W. V.; and Tinic, S. M.. “Risk Aversion, Uncertain Information, and Market Efficiency.” Journal of Financial Economics, 22 (12 1988), 355–385.CrossRefGoogle Scholar
Chan, K. C. “On the Return of the Contrarian Investment Strategy.” Journal of Business, 61 (04 1988), 147–163.CrossRefGoogle Scholar
Cox, D. R., and Peterson, D. R.. “Stock Returns following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance.” Journal of Finance, 49 (03 1994), 255–267.Google Scholar
DeBondt, W. F. M., and Thaler, R. H.. “Does the Stock Market Overreact?” Journal of Finance, 40 (07 1985), 739–805.Google Scholar
DeBondt, W. F. M., and Thaler, R. H.. “A Mean Reverting Walk down Wall Street.” Journal of Economic Perspectives, 3 (Winter 1989), 189–202.Google Scholar
Howe, J. S. “Evidence on Stock Market Overreaction.” Financial Analysts Journal, 42 (07–08 1986), 74–77.CrossRefGoogle Scholar
Kaul, G., and Nimalendran, M.. “Price Reversal: Bid-Ask Errors or Market Overreaction?” Journal of Financial Economics, 28 (11–12 1990), 67–93.CrossRefGoogle Scholar
Keim, D. B. “Trading Patterns, Bid-Ask Spreads and Estimated Security Returns: The Case of Common Stocks at the Turn of the Year.” Journal of Financial Economics, 25 (11 1989), 75–98.CrossRefGoogle Scholar
Lehmann, B. N. “Fads, Martingales, and Market Efficiency.” Quarterly Journal of Economics, 55 (02 1990), 1–28.CrossRefGoogle Scholar
Pettengill, G. N., and Jordan, B. D.. “Seasonally and Price Reversals in Daily Security Returns.” Journal of the Midwest Finance Association, 18 (1989), 1–15.Google Scholar
Renshaw, E. F. “Stock Market Panics: A Test of Efficient Market Hypothesis.” Financial Analysts Journal, 40 (05–06 1984), 48–51.CrossRefGoogle Scholar
Zarowin, P. “Size, Seasonality, and Stock Market Overreaction.” Journal of Financial and Quantitative Analysis, 25 (03 1990), 113–125.CrossRefGoogle Scholar