Large Price Changes and Subsequent Returns

Journal of Investment Management, 2013

Posted: 13 Sep 2014

See all articles by Suresh Govindaraj

Suresh Govindaraj

Rutgers University - Rutgers Business School - Newark and New Brunswick

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business

Chen Zhao

Rutgers Business School - Newark and New Brunswick

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2013

Abstract

We investigate whether large stock price changes are associated with short-term reversals or momentum, conditional on the issuance of analyst price target or earnings forecast revisions immediately following these price changes. Our study provides evidence that prices of stocks exhibit momentum when analysts issue revisions after large price shocks, and suggests that the initial price changes were indeed based on new information. In contrast, when price changes are not followed by immediate analyst revisions, we document short-term reversals, indicating that the initial price shocks were likely caused by liquidity or noise traders. A trading strategy that is based on the direction of the price change and the existence of analyst revisions in the same direction earns significant abnormal monthly returns (over 1%).

Keywords: Analyst price target revisions, Analyst earnings forecast revisions, Large price changes, Trading strategy

JEL Classification: G11, G12, C14, M41

Suggested Citation

Govindaraj, Suresh and Livnat, Joshua and Savor, Pavel G. and Zhao, Chen, Large Price Changes and Subsequent Returns (December 12, 2013). Journal of Investment Management, 2013. Available at SSRN: https://ssrn.com/abstract=2494945

Suresh Govindaraj (Contact Author)

Rutgers University - Rutgers Business School - Newark and New Brunswick ( email )

1 Washington Park
Room #934
Newark, NJ 07102
United States

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

Chen Zhao

Rutgers Business School - Newark and New Brunswick ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

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