Inadequate Stock Price Reactions; Evidence from Prague Stock Exchange

Lukas Marek () and Ludek Benada
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Lukas Marek: Department of Finance, Faculty of Economics and Administration, Masaryk University, Brno, Czech Republic
Ludek Benada: Department of Finance, Faculty of Economics and Administration, Masaryk University and Department of Finance, Mendel University, Brno, Czech Republic

Czech Journal of Economics and Finance (Finance a uver), 2020, vol. 70, issue 4, 332-349

Abstract: The paper examines how effectively a price-generating information is incorporated into the stock price. The research is dedicated to the fourteen main stocks on the Prague Stock Exchange. The investigated period was November 2012 - December 2018. The research applies a test for identifying significant price-related information, a so-called swap variance test. We analyse a price response to such information shocks. The results include both positive and negative shocks, where the positive ones are more frequent. A further exploration confirmed the existence of short-term and mid-term underreaction in the case of positive news and short term underreaction in the case of negative news. The evidence of abnormal returns identified the presence of an information inefficiency on the investigated market. The inefficiency related to negative information shocks arrives much earlier, but also lasts only for a couple of days. On the other hand, our results show that positive information shocks are more pervasive according to a portfolio holding period. We deduct from the results that investors perceive losses and gains differently and thus behave differently following the unexpected stock related news. In overall, the investors act more precise when the stock price tumbles.

Keywords: market efficiency; price jumps; swap variance; underreaction (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:70:y:2020:i:4:p:332-349

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