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A test of US equity market reaction to surprises in an era of high trading volume

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  • Richard Ajayi
  • Seyed Mehdian
  • Mark Perry

Abstract

This paper examines the reactions of investors to the arrival of unexpected information in five major US equity markets from 1990 to 2001, a period characterized by high daily trading volume and the increasing presence of noise-traders. Market surprises are identified using a strictly quantitative approach, cumulative abnormal returns are calculated and tracked for a period of 30 days after each favourable or unfavourable event. The empirical results provide evidence that investors' reactions during the sample period are consistent with the prediction of the Uncertain Information Hypothesis in all markets except NASDAQ. One major implication of these results for investors is that implementing a contrarian strategy of buying current losers and selling current winners will not generate superior returns.

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  • Richard Ajayi & Seyed Mehdian & Mark Perry, 2006. "A test of US equity market reaction to surprises in an era of high trading volume," Applied Financial Economics, Taylor & Francis Journals, vol. 16(6), pages 461-469.
    • Handle: RePEc:taf:apfiec:v:16:y:2006:i:6:p:461-469
    DOI: 10.1080/09603100500400510
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    Cited by:

    1. Nikoletta Poutachidou & Stephanos Papadamou, 2021. "The Effect of Quantitative Easing through Google Metrics on US Stock Indices," IJFS, MDPI, vol. 9(4), pages 1-19, October.
    2. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    3. Chun-Teck Lye & Tuan-Hock Ng & Kwee-Pheng Lim & Chin-Yee Gan, 2020. "Investor protection and market reaction to unusual market activity replies," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 16(8), pages 2034-2069, July.
    4. Mazouz, Khelifa & Joseph, Nathan Lael & Palliere, Clement, 2009. "Stock index reaction to large price changes: Evidence from major Asian stock indexes," Pacific-Basin Finance Journal, Elsevier, vol. 17(4), pages 444-459, September.
    5. Mazouz, Khelifa & Joseph, Nathan L. & Joulmer, Joulmer, 2009. "Stock price reaction following large one-day price changes: UK evidence," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1481-1493, August.
    6. Soner AKKOC & Nasif OZKAN, 2013. "An Empirical Investigation of the Uncertain Information Hypothesis: Evidence From Borsa Istanbul," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 7(2), pages 101-119.

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