Stock Returns Following Large Price Changes and News Releases – Evidence from Germany

Credit and Capital Markets 49 (1/2016), 57–91

32 Pages Posted: 6 Mar 2014 Last revised: 24 Feb 2017

See all articles by Rainer Baule

Rainer Baule

University of Hagen

Christian Tallau

Münster University of Applied Sciences

Date Written: March 17, 2015

Abstract

We revisit the overreaction hypothesis in the light of information effects. Using a sample period from 2005–2012 covering 2,542 large price changes in the German stock market, our results indicate that information effects can explain both overreaction and underreaction patterns. Specifically, we find that large positive price changes without public information signals are followed by short-term price reversals. In contrast, negative price shocks concurrent with a public announcement are associated by price continuations. The results are robust to size effects and sub-periods. Furthermore, we design a trading strategy to show that the observed return predictability could have been exploited for large negative price changes.

Keywords: overreaction, market efficiency, event study

JEL Classification: G14

Suggested Citation

Baule, Rainer and Tallau, Christian, Stock Returns Following Large Price Changes and News Releases – Evidence from Germany (March 17, 2015). Credit and Capital Markets 49 (1/2016), 57–91. Available at SSRN: https://ssrn.com/abstract=2405373 or http://dx.doi.org/10.2139/ssrn.2405373

Rainer Baule

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Christian Tallau (Contact Author)

Münster University of Applied Sciences ( email )

Corrensstrasse 25
Muenster, 48149
Germany

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