On Anticipated Announcements: Profit Taking Strategies and Price Dynamics

Posted: 2 Oct 1995

See all articles by Alexander Benos

Alexander Benos

University of Piraeus - Department of Banking and Financial Management; National Bank of Greece

Abstract

I study a two-period dynamic model of trading in a quote- driven market when a public earnings announcement is anticipated. Two scenaria are contrasted in order to highlight phenomena such as the notorious post-earnings announcement price drift and short-term profit taking. In the first one insiders overestimate the precision of their private information; in the other they do not. The analysis suggests first that "naive expectations formation" modeled as overconfidence of informed investors is not sufficient for the price drift to develop in a strategic environment. Market liquidity trading volume and price variability are analysed in both scenaria. It is found that (i) volume and liquidity may be negatively correlated; (ii) rational insiders may follow profit taking strategies and (iii) prices may exhibit higher variability in the presence of rational insiders. Finally the market making environment is shown to be important to price dynamics and the existence of equilibrium.

JEL Classification: M41, D82, G35

Suggested Citation

Benos, Alexander V., On Anticipated Announcements: Profit Taking Strategies and Price Dynamics. Available at SSRN: https://ssrn.com/abstract=55464

Alexander V. Benos (Contact Author)

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

National Bank of Greece ( email )

86 Eolou Str.
10232 Athens
Greece

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