The reversal of large stock price declines: The case of large firms

Are broad market shocks anticipated by investors? Evidence from major equity and index options markets

“…For example, Chan (2003), Benou and Richie (2003), Bremer, Hiraki, and Sweeney (1997), among others, report evidence consistent with reversals after extreme stock price movements (see also Atkins & Dyl, 1990;Bremer & Sweeney, 1991;Brown, Harlow, & Tinic, 1988;Cox & Peterson, 1994;Howe, 1986). Dennis and Strickland (2002) argue that abnormal returns following large price drops depend on the level of institutional ownership of a stock.…”

“…For example, Bremer and Sweeney (1991) suggest that an extreme price movement for a stock is when the stock price drops by at least 10%, Howe (1986) employs weekly price changes of more than 50%, Atkins and Dyl (1990) use the largest price change in a 300-day window, Benou and Richie (2003) use a rule of 20% during a specific month to define a significant stock price decline, Dennis and Strickland (2002) define large price declines as days where the absolute value of the market's return is down 2% or more, Schnusenberg and Madura (2001) use the top (bottom) 10 percentile of computed abnormal daily returns to define winner (loser) days for stock market indexes, among others. Some studies employ the market model to adjust for risk; however, this relies on the assumption that the market model is valid.…”

The Price Behavior of REITs Surrounding Extreme Market-Related Events

“…Atkins and Dyl (1990) examine the relation between short-run return reversals and bidask spreads and find that stocks with lowest bid-ask spreads have the smallest daily abnormal returns. Benou and Richie (2003) focus on large firms only. Campbell et al (1993) [CGW] build a model that implies that non-informational trading will cause prices to deviate from their fundamental price.…”

“…Most of these studies focus on individual stock events, such as Atkins and Dyl (1990), Lehmann (1990), Bremer and Sweeney (1991), Cox and Peterson (1994), Park (1995), and Benou and Richie (2003). In all of these studies, return reversals and abnormal returns are employed to measure the reactions to shocks.…”

Do size and unobservable company factors explain stock price reversals?

“…On the other hand, significant abnormal returns were found in the opposite direction for the NASDAQ samples of both Winners and Losers. Benou and Richie (2003) argue that CAPM betas are not constant over time as assumed by DT and proceed to model abnormal returns of large firms according to a GARCH specification. They then estimated a cross sectional regression of CARs against initial abnormal returns (20% monthly declines) and industry dummies.…”