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How Do Investors Determine Stock Prices after Large Price Shocks?

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  • Kevin Brady
  • Arjan Premti

Abstract

Most large stock price shocks are not accompanied by publicly available information. Then, what other information do investors use to set prices? The authors find that investors rely on reference points and their private information signals. Stocks closer to their 52-week high (52-week low) have negative (positive) returns in the days that follow a large negative (positive) price shock. These results suggest that investors anchor to these reference points and underreact on the event day. The authors also find that future returns drift in the direction of the shock when the stocks’ abnormal returns before the shock are in the opposite direction.

Suggested Citation

  • Kevin Brady & Arjan Premti, 2019. "How Do Investors Determine Stock Prices after Large Price Shocks?," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 20(3), pages 354-368, July.
    • Handle: RePEc:taf:hbhfxx:v:20:y:2019:i:3:p:354-368
    DOI: 10.1080/15427560.2018.1511563
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    Cited by:

    1. Gizelle D. Willows & Daniel W. Richards, 2023. "Buy and buy again: The impact of unique reference points on (re)purchase decisions," International Review of Finance, International Review of Finance Ltd., vol. 23(2), pages 301-316, June.
    2. Yitao Li & Umar Islambekov & Cuneyt Akcora & Ekaterina Smirnova & Yulia R. Gel & Murat Kantarcioglu, 2019. "Dissecting Ethereum Blockchain Analytics: What We Learn from Topology and Geometry of Ethereum Graph," Papers 1912.10105, arXiv.org.

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