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Asymmetric Reaction to Information and Serial Dependence of Short-run Returns

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Abstract

This paper studies the daily stock price reaction to new information of portfolios grouped by size quintiles. To that end, cross-correlations, autocorrelations and Dimson beta regressions are analyzed. Based on a sample of shares traded in the Santiago de Chile Stock Exchange for the 1991-1998 period, results show that larger company stock prices –as measured by market capitalization– react to both good and bad news sooner than the smaller ones do. Thus a crossed effect appears, although not as a cascade: only the prices of large firms react earlier than the rest. These effects do not seem to be caused by non-trading. There also are significant asymmetric lagged and cross-effects. Good news has a more pronounced lagged effect than bad news does.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): V (2002)
Issue (Month): (November)
Pages: 273-292

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Handle: RePEc:cem:jaecon:v:5:y:2002:n:2:p:273-292

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Keywords: efficient market hypothesis; cross-serial autocorrelation; emerging markets;

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  1. Badrinath, S G & Kale, Jayant R & Noe, Thomas H, 1995. "Of Shepherds, Sheep, and the Cross-autocorrelations in Equity Returns," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 401-30.
  2. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
  3. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  4. Andrew W. Lo & A. Craig MacKinlay, 1991. "An Econometric Analysis of Nonsynchronous Trading," NBER Working Papers 2960, National Bureau of Economic Research, Inc.
  5. McQueen, Grant & Pinegar, Michael & Thorley, Steven, 1996. " Delayed Reaction to Good News and the Cross-Autocorrelation of Portfolio Returns," Journal of Finance, American Finance Association, vol. 51(3), pages 889-919, July.
  6. Blume, Marshall E. & Stambaugh, Robert F., 1983. "Biases in computed returns : An application to the size effect," Journal of Financial Economics, Elsevier, vol. 12(3), pages 387-404, November.
  7. Tarun Chordia & Bhaskaran Swaminathan, 2000. "Trading Volume and Cross-Autocorrelations in Stock Returns," Journal of Finance, American Finance Association, vol. 55(2), pages 913-935, 04.
  8. Eugene F. Fama, . "Market Efficiency, Long-term Returns, and Behavioral Finance," CRSP working papers 340, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Mech, Timothy S., 1993. "Portfolio return autocorrelation," Journal of Financial Economics, Elsevier, vol. 34(3), pages 307-344, December.
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Cited by:
  1. Bley, Jorg, 2011. "Are GCC stock markets predictable?," Emerging Markets Review, Elsevier, vol. 12(3), pages 217-237, September.
  2. Eduardo Sandoval & Rodrigo Saens, 2004. "The Conditional Relationship Between Portfolio Beta and Return: Evidence from Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(122), pages 65-89.

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