Large changes in stock prices: Market, liquidity, and momentum effect

Abstract

► This article investigates the determinants of large changes in stock prices. ► Market and liquidity are the most important variables explaining the big gains. ► Momentum effect mostly explains sharp declines. ► Size and book-to-market ratio have little power in explaining large changes. ► The asymmetry fact in occasions of large changes is found in three stock exchanges. This article investigates the determinants of large changes in stock prices. Empirical evidences suggest that the asymmetry phenomenon in determinants of large changes in stock prices is found in three stock exchanges. In the New York Stock Exchange (NYSE), momentum effect accounts for most of the likelihood of big gains in stock prices, while liquidity characteristics account for sharp declines of stock prices. An interesting finding is that the opposite is true for stocks traded in Amex and NASDAQ. The possible explanations of the different results in different stock exchanges may attribute to the characteristics of firms listed in these stock exchanges are different.