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Market Reaction to Quarterly Earnings' Announcements: A Stochastic Dominance Based Test of Market Efficiency

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Author Info

  • Haim Falk

    (Faculty of Business, McMaster University, Hamilton, Ontario, Canada L8S 4M4)

  • Haim Levy

    (Hebrew University of Jerusalem, Jerusalem, Israel)

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    Abstract

    The use of the CAPM in empirical research is subject to some criticism. In light of this criticism the Stochastic Dominance criteria are offered as an alternative research method for the examination of market efficiency. The underlying assumptions of the two frameworks are discussed and the Stochastic Dominance technique is demonstrated via the examination of market reaction to quarterly earnings announcements during the 24 quarters commencing with October 1962. The findings are compared to those of Watts (Watts, R. The Time Series Behavior of Quarterly Earnings. Unpublished Paper, University of Newcastle, Newcastle, N.S.W. 1975, quoted in Watts [1978].) who utilized the same data base. In contrast to Watts' conclusion, our analysis suggests that the market was efficient during the entire period examined and that no significant differences in market behavior between the first and the second 12-month periods was evident. The discord may be attributed to the relative effectiveness of the two analytical tools and some differences in the research designs.

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    File URL: http://dx.doi.org/10.1287/mnsc.35.4.425
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 35 (1989)
    Issue (Month): 4 (April)
    Pages: 425-446

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    Handle: RePEc:inm:ormnsc:v:35:y:1989:i:4:p:425-446

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    Related research

    Keywords: market efficiency; capital asset pricing model; stochastic dominance;

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    Cited by:
    1. Wong, Wing-Keung & Phoon, Kok Fai & Lean, Hooi Hooi, 2008. "Stochastic dominance analysis of Asian hedge funds," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 204-223, June.
    2. Lean, H.H. & McAleer, M.J. & Wong, W.K., 2010. "Market Efficiency of Oil Spot and Futures: A Stochastic Dominance Approach," Econometric Institute Research Papers EI 2010-11, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Wing-Keung Wong & Raymond H. Chan, 2005. "Prospect and Markowitz Stochastic Dominance," Development Research Unit Working Paper Series 08/05, Monash University, Department of Economics.
    4. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2013. "Risk-averse and Risk-seeking Investor Preferences for Oil Spot and Futures," Documentos del Instituto Complutense de Análisis Económico 2013-31, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, revised Aug 2013.
    5. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2010. "Investor Preferences for Oil Spot and Futures Based on Mean-Variance and Stochastic Dominance," CARF F-Series CARF-F-220, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    6. Post, G.T., 2002. "A Stochastic Dominance Approach to Spanning," ERIM Report Series Research in Management ERS-2002-01-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    7. Lean, Hooi Hooi & McAleer, Michael & Wong, Wing-Keung, 2010. "Market efficiency of oil spot and futures: A mean-variance and stochastic dominance approach," Energy Economics, Elsevier, vol. 32(5), pages 979-986, September.
    8. Hooi Lean & Kok Phoon & Wing-Keung Wong, 2013. "Stochastic dominance analysis of CTA funds," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 155-170, January.
    9. Qiao, Zhuo & Wong, Wing-Keung & Fung, Joseph K.W., 2013. "Stochastic dominance relationships between stock and stock index futures markets: International evidence," Economic Modelling, Elsevier, vol. 33(C), pages 552-559.

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