Short Term Predictability, Volume and Microstructure Effects in Stock Prices

59 Pages Posted: 11 Jul 2008

See all articles by Kevin Keasey

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Robert Hudson

Hull University Business School (HUBS)

Shima Amini

University of Leeds; University of Leeds - Division of Accounting and Finance

Date Written: July 10, 2008

Abstract

This paper documents strong evidence for short term predictability of individual stocks in the London Stock Exchange. We find empirical evidence for price reversals after large price changes and price continuation after small price changes. Our results indicate that large companies seem to react more efficiently to previous price changes and that the effect has been robust over time. The results are robust to non-normality of returns and are not explained by market microstructure effects like nonsynchronous trading or bid-ask bounce. We further investigate whether the effect can be explained by rational asset-pricing theory or behavioral theories. In these investigations we employ volume as an additional explanatory variable. Finally when considering whether the predictability has any implications for market efficiency we show that the size of bid-ask spreads are highly related to previous price movements.

Keywords: Predictability, Overreaction, Underreaction, Market efficiency, Momentum, Volume, Microstructure

JEL Classification: G10

Suggested Citation

Keasey, Kevin and Hudson, Robert and Amini, Shima, Short Term Predictability, Volume and Microstructure Effects in Stock Prices (July 10, 2008). Available at SSRN: https://ssrn.com/abstract=1158083 or http://dx.doi.org/10.2139/ssrn.1158083

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Robert Hudson (Contact Author)

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Shima Amini

University of Leeds ( email )

Leeds, LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

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