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Estimating the Effects of Information Surprises and Trading on Stock Returns Using a Mixed Jump-Diffusion Model

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  • Nimalendran, M

Abstract

I present a methodology that uses the mixed jump-diffusion model for stock returns to estimate the separate effects of information surprises and strategic trading around corporate events. Using simulation techniques, I show that for events with multiple announcements spread over a long time, the estimators derived from the mixed jump-diffusion model are more powerful compared to the traditional cumulative abnormal return estimators. The new methodology is used to study the separate effects of information surprises and strategic trading associated with blockholdings and subsequent targeted repurchases. I find that for more than 93 percent of the firms in our sample the mixed jump-diffusion model is statistically superior to the pure diffusion model in describing stock returns. More important, I find a statistically significant negative effect due to trading, while the average effect around announcements is statistically insignificant. In contrast, the standard cumulative abnormal return is not statistically different from zero. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Nimalendran, M, 1994. "Estimating the Effects of Information Surprises and Trading on Stock Returns Using a Mixed Jump-Diffusion Model," The Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 451-473.
    • Handle: RePEc:oup:rfinst:v:7:y:1994:i:3:p:451-73
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    Cited by:

    1. Gronwald, Marc, 2019. "Is Bitcoin a Commodity? On price jumps, demand shocks, and certainty of supply," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 86-92.
    2. Jui-Cheng Hung & Shi-Jie Jiang & Chien-Liang Chiu, 2007. "Jump risk of Presidential election: evidence from Taiwan stock and foreign exchange markets," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2231-2240.
    3. Gronwald, Marc, 2012. "A characterization of oil price behavior — Evidence from jump models," Energy Economics, Elsevier, vol. 34(5), pages 1310-1317.
    4. Osman Kilic & David Tufte & M. Hassan, 1999. "The 1994–1995 Mexican Currency Crisis and U.S. Bank Stock Returns," Journal of Financial Services Research, Springer;Western Finance Association, vol. 16(1), pages 47-60, September.
    5. Halil Kiymaz & Osman Kilic, 2004. "International mergers and acquisitions: A jump diffusion model application," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 28(2), pages 239-251, June.
    6. Aktas, Nihat & de Bodt, Eric & Cousin, Jean-Gabriel, 2007. "Event studies with a contaminated estimation period," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 129-145, March.
    7. Chang, Kook-Hyun & Kim, Myung-Jig, 2001. "Jumps and time-varying correlations in daily foreign exchange rates," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 611-637, October.
    8. Lobo, Bento J., 1999. "Jump risk in the U.S. stock market: Evidence using political information," Review of Financial Economics, Elsevier, vol. 8(2), pages 149-163.
    9. Lin, Cho-Min & Lee, Yen-Hsien & Chiu, Chien-Liang, 2009. "Structural changes in foreign investors' trading behavior and the corresponding impact on Taiwan's stock market," Research in International Business and Finance, Elsevier, vol. 23(1), pages 78-89, January.
    10. Koussis, Nicos & Martzoukos, Spiros H. & Trigeorgis, Lenos, 2013. "Multi-stage product development with exploration, value-enhancing, preemptive and innovation options," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 174-190.
    11. Lee, Jongsub & Naranjo, Andy & Velioglu, Guner, 2018. "When do CDS spreads lead? Rating events, private entities, and firm-specific information flows," Journal of Financial Economics, Elsevier, vol. 130(3), pages 556-578.

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