Paths to Convergence: Stock Price Behavior after Donald Trump's Election

55 Pages Posted: 29 Jan 2018

See all articles by Alexander F. Wagner

Alexander F. Wagner

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Alexandre Ziegler

University of Zurich - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2018

Abstract

How do market prices adjust towards their equilibrium values? Donald Trump's election, an aggregate surprise that shook up the prices of all stocks, provides an ideal setting to investigate this question. Indeed, the ratio of price spreads among stock returns relative to aggregate market volatility on the first post-election day was one of the greatest seen in this century. Markets assessed the correct direction of relative price moves by individual stocks impressively quickly. The vast majority of stocks moved in the appropriate direction on the first day. However, given the extreme shock, iterations were required to get relative prices to converge to the right levels. To illustrate, return continuation from day 1 to day 2 was extreme by historical standards. Momentum persisted for three days and was followed by a brief reversal before prices settled. Since little new information was released after the election -- a fact that we confirm by analyzing both transition team announcements and news flows -- these return patterns represented movement toward a new equilibrium, and not a moving equilibrium. Stock return predictability was primarily driven by the part of first-day returns explained by firm characteristics, such as corporate taxes and foreign revenues, not by residual returns. The returns associated with a range of firm characteristics persisted for several days. Our results support prominent theories of slow but predictable diffusion of information into stock prices.

Keywords: corporate taxes, election surprise, event study, Market Efficiency, Momentum, predictability, price contribution analysis, reversal, Stock returns, trade policy

JEL Classification: G12, G14, H25, O24

Suggested Citation

Wagner, Alexander F. and Zeckhauser, Richard J. and Ziegler, Alexandre, Paths to Convergence: Stock Price Behavior after Donald Trump's Election (January 2018). CEPR Discussion Paper No. DP12657, Available at SSRN: https://ssrn.com/abstract=3112282

Alexander F. Wagner (Contact Author)

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Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Alexandre Ziegler

University of Zurich - Department of Banking and Finance ( email )

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Zürich, 8032
Switzerland

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