Short-term market reaction after extreme price changes of liquid stocks |
| |
| Authors: | Ádám G Zawadowski György Andor János Kertész |
| |
| Institution: | 1. Department of Economics , Princeton University , Princeton, NJ 08544, USA;2. Department of Management and Business Economics , Budapest University of Technology and Economics , Müegyetem rkp. 9, H-1111 Budapest, Hungary azawadow@princeton.edu;4. Department of Management and Business Economics , Budapest University of Technology and Economics , Müegyetem rkp. 9, H-1111 Budapest, Hungary;5. Department of Theoretical Physics , Budapest University of Technology and Economics , Budafoki út 8, H-1111 Budapest, Hungary;6. Laboratory of Computational Engineering , Helsinki University of Technology , P.O. Box 9400, FIN-02015 HUT, Finland |
| |
| Abstract: | In our empirical study we examine the dynamics of the price evolution of liquid stocks after experiencing a large intra-day price change, using data from the NYSE and the NASDAQ. We find a significant reversal for both intra-day price decreases and increases. Volatility, volume and, in the case of the NYSE, the bid–ask spread, which increase sharply at the event, stay significantly high days afterwards. The decay of the volatility follows a power law in accordance with the `Omori law'. While on the NYSE the large widening of the bid–ask spread eliminates most of the profits that can be achieved by an outside investor, on the NASDAQ the bid–ask spread stays almost constant, yielding significant short-term profits. The results thus give an insight into the size and speed of the realization of an excess return for providing liquidity in a turbulent market. |
| |
| Keywords: | Liquid stocks Extreme price changes Market reaction |
|
|
