Extreme Return Days and the Role of Purchase Prices

57 Pages Posted: 2 Dec 2020 Last revised: 30 Mar 2022

See all articles by Brad Cannon

Brad Cannon

Binghamton University

Hannes Mohrschladt

University of Muenster - Finance Center

Date Written: October 16, 2020

Abstract

We provide evidence that purchase prices influence how investors behave towards extreme returns. Using a sample of individual investor trades and extreme return dates, we show that when a stock is trading farther from an investor’s purchase price, the investor is more likely to trade in the direction of the stock’s return. Consistent with a relative overreaction, stocks trading farthest from their average purchase price experience the most extreme returns, which are then followed by greater subsequent reversals. A cross-sectional strategy motivated by these findings earns a monthly alpha of 1.02%.

Keywords: Reference Prices, Over- and Underreaction, Information Processing

JEL Classification: G12, G41

Suggested Citation

Cannon, Brad and Mohrschladt, Hannes, Extreme Return Days and the Role of Purchase Prices (October 16, 2020). Available at SSRN: https://ssrn.com/abstract=3712902 or http://dx.doi.org/10.2139/ssrn.3712902

Brad Cannon

Binghamton University ( email )

United States
8015899901 (Phone)

Hannes Mohrschladt (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

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