IMMEDIATE AND LONGER-TERM STOCK PRICE DYNAMICS FOLLOWING LARGE STOCK PRICE CHANGES

Abstract

The study explores the correlation between the immediate and the longer-term stock returns following large daily price moves. Following the previous literature, which documents a tendency for price reversals after initial large price moves, I suggest that if a large stock price move is immediately followed by a short-term price drift, then it may indicate that the company-specific shock is more completely incorporated in the stock price, significantly increasing the probability of subsequent longer-term price reversal. Analyzing a vast sample of large stock price moves, I document that negative (positive) longer-term stock price reversals after large price increases (decreases) are significantly more pronounced if the latter are immediately followed by relatively high (low) short-term cumulative abnormal returns, that is, by short-term price drifts. The effect remains significant after accounting for additional company-specific (size, market model beta, historical, or conditional volatility) and event-specific (stock’s return and trading volume on the event day) factors.