Unusual News Events and the Cross-Section of Stock Returns

66 Pages Posted: 18 Mar 2009 Last revised: 27 Feb 2012

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Anna Scherbina

University of California, Davis - Graduate School of Management

Yi Tang

Fordham University - Gabelli School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

Keywords: unusual news events, volatility shocks, differences of opinion

JEL Classification: G10, G12, G14

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

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Anna D. Scherbina (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 754-8076 (Phone)
(530) 752-2924 (Fax)

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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