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Short-term market reaction after extreme price changes of liquid stocks

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Author Info
Ádám G. Zawadowski
György Andor
János Kertész
Abstract

In our empirical study we examine the dynamics of the price evolution of liquid stocks after experiencing a large intra-day price change, using data from the NYSE and the NASDAQ. We find a significant reversal for both intra-day price decreases and increases. Volatility, volume and, in the case of the NYSE, the bid--ask spread, which increase sharply at the event, stay significantly high days afterwards. The decay of the volatility follows a power law in accordance with the `Omori law'. While on the NYSE the large widening of the bid--ask spread eliminates most of the profits that can be achieved by an outside investor, on the NASDAQ the bid--ask spread stays almost constant, yielding significant short-term profits. The results thus give an insight into the size and speed of the realization of an excess return for providing liquidity in a turbulent market.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Quantitative Finance.

Volume (Year): 6 (2006)
Issue (Month): 4 (August)
Pages: 283-295
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Handle: RePEc:taf:quantf:v:6:y:2006:i:4:p:283-295

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Related research
Keywords: Liquid stocks; Extreme price changes; Market reaction;

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