News Events, Information Acquisition, and Serial Correlation
University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)
Craig W. Holden
Indiana University - Kelley School of Business - Department of Finance
The Journal of Business, Vol. 75, No. 1, January 2002
We develop a model that accounts for medium-term continuation (momentum) in asset returns by analyzing information acquisition about news events (such as earnings announcements) in a multiperiod setting. As more and more agents become informed about news events, temporal uncertainty is resolved endogenously through market prices over time, which leads to positive autocorrelations in asset returns. We empirically estimate serial correlations over medium-term horizons for portfolios sorted by firm size and past stock performance and find that calibration of serial correlations in our model spans the range of empirically estimated correlations.
Date posted: January 19, 2002