Paths to Convergence: Stock Price Behavior After Donald Trump's Election
Alexander F Wagner,
Richard Zeckhauser () and
No 12657, CEPR Discussion Papers from C.E.P.R. Discussion Papers
How do market prices adjust towards their equilibrium values? Donald Trump's election, an aggregate surprise that shook up the prices of all stocks, provides an ideal setting to investigate this question. Indeed, the ratio of price spreads among stock returns relative to aggregate market volatility on the first post-election day was one of the greatest seen in this century. Markets assessed the correct direction of relative price moves by individual stocks impressively quickly. The vast majority of stocks moved in the appropriate direction on the first day. However, given the extreme shock, iterations were required to get relative prices to converge to the right levels. To illustrate, return continuation from day 1 to day 2 was extreme by historical standards. Momentum persisted for three days and was followed by a brief reversal before prices settled. Since little new information was released after the election â€“ a fact that we confirm by analyzing both transition team announcements and news flows â€“ these return patterns represented movement toward a new equilibrium, and not a moving equilibrium. Stock return predictability was primarily driven by the part of first-day returns explained by firm characteristics, such as corporate taxes and foreign revenues, not by residual returns. The returns associated with a range of firm characteristics persisted for several days. Our results support prominent theories of slow but predictable diffusion of information into stock prices.
Keywords: corporate taxes; election surprise; event study; Market Efficiency; Momentum; predictability; price contribution analysis; reversal; Stock returns; trade policy (search for similar items in EconPapers)
JEL-codes: G12 G14 H25 O24 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
Working Paper: Paths to Convergence: Stock Price Behavior After Donald Trump's Election (2018)
Working Paper: Paths to Convergence: Stock Price Behavior after Donald Trump's Election (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12657
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=12657
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().