Asymmetric Asset Price Reaction to News and Arbitrage Risk

35 Pages Posted: 8 Jan 2009

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Meng Li

Roosevelt University in Chicago - Walter E. Heller College of Business

Date Written: December 12, 2008

Abstract

This study documents that high book-to-market (value) and low book-to-market (glamour) stock prices react asymmetrically to both common and firm-specific information. Specifically, we find that value stock prices exhibit a considerably slow adjustment to both common and firm-specific information relative to glamour stocks. The results show that this pattern of differential price adjustment between value and glamour stocks is mainly driven by the high arbitrage risk borne by value stocks. The evidence is consistent with the arbitrage risk hypothesis of Shleifer and Vishny (1997), predicting that idiosyncratic risk, a major impediment to arbitrage activity, amplifies the informational loss of value stocks as a result of arbitrageurs' (informed investors) reduced participation in value stocks because of their inability to fully hedge idiosyncratic risk.

Keywords: Price Speed of Adjustment, High and Low Book-to-Market Stocks, Limits to arbitrage, Idiosyncratic Risk

JEL Classification: G11, G12, G14, G32, G35

Suggested Citation

Doukas, John A. and Li, Meng, Asymmetric Asset Price Reaction to News and Arbitrage Risk (December 12, 2008). Available at SSRN: https://ssrn.com/abstract=1323798 or http://dx.doi.org/10.2139/ssrn.1323798

John A. Doukas (Contact Author)

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
Suite 2080
Norfolk, VA 23529-0222
United States
757-683-5521 (Phone)

HOME PAGE: http://www.efmaefm.org/0DOUKAS/doukas.php

Meng Li

Roosevelt University in Chicago - Walter E. Heller College of Business ( email )

430 South Michigan Avenue
Chicago, IL 60605
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
152
Abstract Views
1,374
rank
264,532
PlumX Metrics