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Systematic Patterns Before and After Large Price Changes: Evidence from High Frequency Data from the Paris Bourse

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  • Foort, HAMELINK
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    Abstract

    : This paper examines the intra-day behavior of asset prices shortly before and after large price changes. Whereas similar studies so far have been based on daily closing price, I use three years of high frequency data of 120 stocks listed on the French stock exchange. Various systematic patterns, in addition to those often reported in the literature, emerge from this data. I find evidence that prices do overreact and that a correction takes place after a large price movement, especially those to the downside. The correction does not take place immediately after the large price change. Prior to this, some very significant and sometimes economically important patterns can be observed. When the bid-ask spread is taken into account, I still find some ex-post profitable trading strategies which are too small in magnitude to suggest market inefficiency.

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    File URL: http://www.hec.fr/var/fre/storage/original/application/f3737cf15ea6c2d7aac0ae42262a9b92.pdf
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    Bibliographic Info

    Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 655.

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    Length: 21 pages
    Date of creation: 01 Jul 1998
    Date of revision:
    Handle: RePEc:ebg:heccah:0655

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    Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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    Related research

    Keywords: predictable pattern; large price change; high frequency data;

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    1. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(3), pages 205-258, September.
    2. Zarowin, Paul, 1989. " Does the Stock Market Overreact to Corporate Earnings Information?," Journal of Finance, American Finance Association, American Finance Association, vol. 44(5), pages 1385-99, December.
    3. Engle, Robert F. & Russell, Jeffrey R., 1997. "Forecasting the frequency of changes in quoted foreign exchange prices with the autoregressive conditional duration model," Journal of Empirical Finance, Elsevier, Elsevier, vol. 4(2-3), pages 187-212, June.
    4. Bremer, Marc & Hiraki, Takato & Sweeney, Richard J., 1997. "Predictable Patterns after Large Stock Price Changes on the Tokyo Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 32(03), pages 345-365, September.
    5. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, American Finance Association, vol. 42(3), pages 557-81, July.
    6. Chan, K C, 1988. "On the Contrarian Investment Strategy," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 61(2), pages 147-63, April.
    7. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(1), pages 3-31, March.
    8. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, Elsevier, vol. 4(2-3), pages 73-114, June.
    9. Ball, Ray & Kothari, S. P., 1989. "Nonstationary expected returns : Implications for tests of market efficiency and serial correlation in returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(1), pages 51-74, November.
    10. Brown, Keith C. & Harlow, W. V. & Tinic, Seha M., 1993. "The Risk and Required Return of Common Stock following Major Price Innovations," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(01), pages 101-116, March.
    11. Bremer, Marc & Sweeney, Richard J, 1991. " The Reversal of Large Stock-Price Decreases," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 747-54, June.
    12. Cox, Don R & Peterson, David R, 1994. " Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 255-67, March.
    13. Brown, Keith C. & Harlow, W. V. & Tinic, Seha M., 1988. "Risk aversion, uncertain information, and market efficiency," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(2), pages 355-385, December.
    14. Chan, K C & Chen, Nai-Fu, 1991. " Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 46(4), pages 1467-84, September.
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