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Unusual News Events and the Cross-Section of Stock Returns
Turan G. Bali CUNY Baruch College - Zicklin School of Business Anna Scherbina University of California, Davis - Graduate School of Management Yi Tang Fordham University January 22, 2009 Abstract: We show that stocks that experience a sudden increase in idiosyncratic volatility earn abnormally high contemporaneous returns but significantly underperform otherwise similar stocks in the future. Our findings indicate that volatility jumps can be traced to unusual firm-level news. We conjecture that these unusual news events increase the level of investor disagreement about firms' fundamental values. Because short-selling of highly volatile stocks is costly, prices rise to reflect the more optimistic views but then revert down as investors' opinions start to converge. The observed patterns of trade order imbalances and effective spreads lend support for this hypothesis.
Keywords: unusual news events, volatility shocks, differences of opinion JEL Classifications: G10, G12, G14 Working Paper SeriesDate posted: March 18, 2009 ; Last revised: March 18, 2009Suggested CitationContact Information
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