Large Price Declines, News, Liquidity, and Trading Strategies: An Intraday Analysis

University of South Carolina Working Paper

39 Pages Posted: 29 Jan 2002

See all articles by Frank Fehle

Frank Fehle

BlueCrest Capital

Volodymyr M. Zdorovtsov

State Street Global Advisors

Date Written: 2003

Abstract

This paper examines whether trading strategies based on short-term price reversals following large one-day losses have economically significant returns. We directly incorporate transactions costs by basing returns on the contemporaneous bid and ask quotes and jointly examine the effects of overreaction, liquidity pressure, and public information flow measures. Consistent with the overreaction hypothesis, trading strategy returns increase in the magnitude of event day loss. Consistent with behavioral models, the reversals are higher for event stocks without concurrent news releases. The evidence is generally supportive of the liquidity pressure hypothesis. The analysis suggests refined trading strategies yielding economically significant positive returns. The results are robust to a number of alternative tests.

Keywords: Reversals, News, Overreaction, Trading Strategies

JEL Classification: G12, G14

Suggested Citation

Fehle, Frank Rudolf and Zdorovtsov, Volodymyr M., Large Price Declines, News, Liquidity, and Trading Strategies: An Intraday Analysis (2003). University of South Carolina Working Paper. Available at SSRN: https://ssrn.com/abstract=298092 or http://dx.doi.org/10.2139/ssrn.298092

Frank Rudolf Fehle (Contact Author)

BlueCrest Capital ( email )

40 Grosvenor Place
London, SW1X 7AW
United Kingdom

Volodymyr M. Zdorovtsov

State Street Global Advisors ( email )

One Lincoln St, Fl 25
Boston, MA 02111
United States

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