Predictable Patterns after Large Stock Price Changes on the Tokyo Stock Exchange

Marc Bremer, Takato Hiraki and Richard J. Sweeney

Journal of Financial and Quantitative Analysis, 1997, vol. 32, issue 3, 345-365

Abstract: This paper extends to Japanese stocks recent research on short-term stock price adjustment to new information. Using standard methodologies, we find that stock returns of firms included in the Nikkei 300 tend to be significantly positive after large price decreases. This is similar to the pattern observed for American stocks in other research. The pattern remains when returns are adjusted for market movements, and exists independently of the October 1987 market break. We find little evidence of significant patterns following large stock price increases. We also find little evidence that non-transaction prices explain the persistent, significant returns observed following large price decreases on the Tokyo Stock Exchange. We conjecture that broker/dealers and TSE member firms respond to large price decreases not by trading for their own profit, but rather by selectively supplying liquidity to their preferred retail customers. We conclude that ordinary investors probably cannot earn economic profits from these statistically significant patterns.

Date: 1997
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