Pervasive underreaction: Evidence from high-frequency data

Hao Jiang, Sophia Zhengzi Li and Hao Wang

Journal of Financial Economics, 2021, vol. 141, issue 2, 573-599

Abstract: We propose a novel high-frequency decomposition of daily stock returns into news- and non-news-driven components, and uncover evidence of pervasive stock market underreaction to firm news. Prices tend to drift in the same direction as the initial market response for several days after the news arrival without reversals. A trading strategy exploiting the return drift generates high abnormal returns and remains profitable after transaction costs. To understand the economic mechanism, we find that the return drift is stronger when investors are distracted. Analysts’ slow adjustments of market expectations following firm news also contribute to the market underreaction.

Keywords: Underreaction; High-frequency; News; Attention; Expectation formation (search for similar items in EconPapers)
JEL-codes: G10 G14 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:2:p:573-599

DOI: 10.1016/j.jfineco.2021.04.003

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