Stock Returns after Major Price Shocks: The Impact of Information

69 Pages Posted: 24 Nov 2008 Last revised: 21 Apr 2014

See all articles by Pavel G. Savor

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business

Date Written: November 4, 2011

Abstract

This paper focuses on stocks that experience major price changes. Using analyst reports as a proxy, I study how information presence affects these stocks' post-event performance. Both regression and portfolio analyses show that price events accompanied by information are followed by drift, while no-information ones in contrast result in reversals. Potential profits available to investors trading on these two phenomena are economically very large. One interpretation of these results is that investors underreact to news about fundamentals and overreact to other shocks that move stock prices. Consistent with this hypothesis, I find that information-based price changes are more strongly correlated with future earnings surprises than no-information ones. Furthermore, drift is observed only when the direction of the price move and of the change in analyst recommendations have the same sign. Finally, I find that the ratio of no-information to information-based price shocks is strongly correlated with aggregate implied volatility and also forecasts future momentum returns.

Keywords: Predictability of Stock Returns, Information, Analyst Reports, Momentum, Reversals

JEL Classification: G12, G14

Suggested Citation

Savor, Pavel G., Stock Returns after Major Price Shocks: The Impact of Information (November 4, 2011). Available at SSRN: https://ssrn.com/abstract=1306233 or http://dx.doi.org/10.2139/ssrn.1306233

Pavel G. Savor (Contact Author)

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

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