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

Adam Zawadowski, Gyorgy Andor and Janos Kertesz

Quantitative Finance, 2006, vol. 6, issue 4, 283-295

Abstract: In our empirical study we examine the dynamics of the price evolution of liquid stocks after experiencing a large intra-day price change, using data from the NYSE and the NASDAQ. We find a significant reversal for both intra-day price decreases and increases. Volatility, volume and, in the case of the NYSE, the bid-ask spread, which increase sharply at the event, stay significantly high days afterwards. The decay of the volatility follows a power law in accordance with the 'Omori law'. While on the NYSE the large widening of the bid-ask spread eliminates most of the profits that can be achieved by an outside investor, on the NASDAQ the bid-ask spread stays almost constant, yielding significant short-term profits. The results thus give an insight into the size and speed of the realization of an excess return for providing liquidity in a turbulent market.

Keywords: Liquid stocks; Extreme price changes; Market reaction (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (26)

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DOI: 10.1080/14697680600699894

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