Stock price reaction following large one-day price changes: UK evidence

We examine the short-term price reaction of 424 UK stocks to large one-day price changes. Using the GJR-GARCH(1,1), we find no statistical difference amongst the cumulative abnormal returns (CARs) of the Single Index, the Fama-French and the Carhart-Fama-French models. Shocks [greater-or-equal, slanted]5% are followed by a significant one-day CAR of 1% for all the models. Whilst shocks [less-than-or-equals, slant]-5% are followed by a significant one-day CAR of -0.43% for the Single Index, the CARs are around -0.34% for the other two models. Positive shocks of all sizes and negative shocks [less-than-or-equals, slant]-5% are followed by return continuations, whilst the market is efficient following larger negative shocks. The price reaction to shocks is unaffected when we estimate the CARs using the conditional covariances of the pricing variables.