Paths to Convergence: Stock Price Behavior After Donald Trump's Election

Alexander Wagner, Richard Zeckhauser and Alexandre Ziegler

No 12657, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 – a fact that we confirm by analyzing both transition team announcements and news flows – 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: Stock returns; Momentum; Reversal; Election surprise; Market efficiency; Predictability; Price contribution analysis; Corporate taxes; Trade policy; Event study (search for similar items in EconPapers)
JEL-codes: G12 G14 H25 O24 (search for similar items in EconPapers)
Date: 2018-01
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Citations: View citations in EconPapers (1)

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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)
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