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

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  • Adam G. Zawadowski
  • Gyorgy Andor
  • Janos Kertesz

Abstract

In our empirical study, we examine the price of liquid stocks after experiencing a large intraday price change using data from the NYSE and the NASDAQ. We find significant reversal for both intraday price decreases and increases. The results are stable against varying parameters. While on the NYSE the large widening of the bid-ask spread eliminates most of the profits that can be achieved by a contrarian strategy, on the NASDAQ the bid-ask spread stays almost constant yielding significant short-term abnormal profits. Furthermore, volatility, volume, and in case of the NYSE the bid-ask spread, which increase sharply at the event, decay according to a power-law and stay significantly high over days afterwards.

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  • Adam G. Zawadowski & Gyorgy Andor & Janos Kertesz, 2004. "Short-term market reaction after extreme price changes of liquid stocks," Papers cond-mat/0406696, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/0406696
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    Cited by:

    1. Adam Ponzi & Fabrizio Lillo & Rosario N. Mantegna, 2006. "Market reaction to temporary liquidity crises and the permanent market impact," Papers physics/0608032, arXiv.org.
    2. Jean-Philippe Bouchaud & J. Doyne Farmer & Fabrizio Lillo, 2008. "How markets slowly digest changes in supply and demand," Papers 0809.0822, arXiv.org.
    3. Andrey KUDRYAVTSEV, 2013. "Mechanism Of Autocorrelations Of Individual Stocks' Opening Returns," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 12, pages 37-56, June.

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