A Market Microstructure Explanation for Predictable Variations in Stock Returns Following Large Price Changes

Posted: 25 Dec 1998  

Jinwoo Park

Hankuk University of Foreign Studies

Abstract

Prior empirical evidence of predictable variations in stock returns following large price changes is found to be, at least in part, driven by the sample selection bias arising from the systematic movement of closing transaction prices within the bid-ask spread. By using the average of the bid- ask prices in the sample selection process, the price reversal on the day following the events (day +1) disappears. For a short-run period after day +1, however, systematic abnormal return patterns are still observed. These short- run price reversals persist even after controlling for the influence of systematic trading patterns around the events. However, investigation of contrarian investment profits from these short-run price reversals shows that the average abnormal returns are not large enough to cover the transaction price movement between the bid and ask prices.

JEL Classification: G13

Suggested Citation

Park, Jinwoo, A Market Microstructure Explanation for Predictable Variations in Stock Returns Following Large Price Changes. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Vol 30, No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6421

Jinwoo Park (Contact Author)

Hankuk University of Foreign Studies ( email )

Department of Fianance
270 Imun-dong Dongdaemun-gu
Seoul, 130-791
Korea

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