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Unusual News Events and the Cross-Section of Stock ReturnsTuran G. BaliGeorgetown University - Robert Emmett McDonough School of Business Anna ScherbinaUniversity of California, Davis - Graduate School of Management Yi TangFordham University - School of Business 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 shocks 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 changes in investor disagreement lend support for this hypothesis.
Number of Pages in PDF File: 66 Keywords: unusual news events, volatility shocks, differences of opinion JEL Classification: G10, G12, G14 working papers seriesDate posted: March 18, 2009 ; Last revised: February 27, 2012Suggested CitationContact Information
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