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

  • Adam Zawadowski
  • Gyorgy Andor
  • Janos Kertesz
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    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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    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680600699894
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    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 6 (2006)
    Issue (Month): 4 ()
    Pages: 283-295

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    Handle: RePEc:taf:quantf:v:6:y:2006:i:4:p:283-295
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