Evidence on stock reaction to market-wide information

Ding Du, Karen Denning, Xiaobing Zhao

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

The main purpose of this paper is to show that the lack of misreaction to common information in previous research may be due to methodological weakness. As of now, there is no evidence which suggests that stocks under-react to common information at short horizons and over-react at longer horizons. Even if stocks under-and/or over-react to common information at the security level, the reaction pattern may not be evident at the market level if only some stocks have such a pattern and their capitalization is small. We show in this manuscript that the lack of misreaction to common information in previous research may be due to methodological weakness. By focusing on the stock level reaction, we find a statistically and economically significant reaction pattern to common information as the behavioral models suggest. This finding thus complements the findings of stock misreaction to firm-specific information, and may benefit researchers attempting to understand investor behavior.

Original languageEnglish (US)
Pages (from-to)297-325
Number of pages29
JournalReview of Pacific Basin Financial Markets and Policies
Volume14
Issue number2
DOIs
StatePublished - Jun 2011

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Keywords

  • behavioral models of asset pricing
  • intangible information
  • Market-wide information
  • size factor

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

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