Estimating the Effects of Information Surprises and Trading on Stock Returns Using a Mixed Jump-Diffusion Model

REVIEW OF FINANCIAL STUDIES Volume 7, Number 3, 1994

Posted: 20 Dec 1998

See all articles by Mahendrarajah Nimalendran

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

Abstract

We present a methodology that uses the mixed jump-diffusion model for stock returns to estimate the separate effects of information surprises and strategic trading around corporate events. Using simulation techniques, we show that for events with multiple announcements spread over a long time, the estimators derived from the mixed jump-diffusion model are more powerful compared to the traditional cumulative abnormal return estimators. Our new methodology is used to study the separate effects of information surprises and strategic trading associated with blockholdings and subsequent targeted repurchases. We find that for more than 93 percent of the firms in our sample the mixed jump-diffusion model is statistically superior to the pure diffusion model in describing stock returns. More importantly, we find a statistically significant negative effect due to trading, while the average effect around announcements is statistically insignificant. In contrast, the standard cumulative abnormal return is not statistically different from zero.

JEL Classification: G12, G14

Suggested Citation

Nimalendran, Mahendrarajah, Estimating the Effects of Information Surprises and Trading on Stock Returns Using a Mixed Jump-Diffusion Model. REVIEW OF FINANCIAL STUDIES Volume 7, Number 3, 1994. Available at SSRN: https://ssrn.com/abstract=5337

Mahendrarajah Nimalendran (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9526 (Phone)
352-392-0301 (Fax)

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