66 Pages Posted: 18 Mar 2009 Last revised: 27 Feb 2012
Date Written: January 22, 2009
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.
Keywords: unusual news events, volatility shocks, differences of opinion
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation
Bali, Turan G. and Scherbina, Anna and Tang, Yi, Unusual News Events and the Cross-Section of Stock Returns (January 22, 2009). Available at SSRN: https://ssrn.com/abstract=1362121 or http://dx.doi.org/10.2139/ssrn.1362121