Large Price Changes and Subsequent Returns

Journal of Investment Management (JOIM), Third Quarter 2014

Posted: 16 Nov 2014

See all articles by Suresh Govindaraj

Suresh Govindaraj

Rutgers University - Rutgers Business School - Newark and New Brunswick

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business; affiliation not provided to SSRN

Zhao Chen

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2014

Abstract

We investigate whether large stock price changes are associated with short-term reversals or momentum, conditional on the issuance of analyst price target or earnings forecast revisions immediately following these price changes. Our study provides evidence that prices of stocks exhibit momentum when analysts issue revisions after large price shocks, and suggests that the initial price changes were indeed based on new information. In contrast, when price changes are not followed by immediate analyst revisions, we document short-term reversals, indicating that the initial price shocks were likely caused by liquidity or noise traders. A trading strategy that is based on the direction of the price change and the existence of analyst revisions in the same direction earns significant abnormal monthly returns (over 1%).

Keywords: Large price changes, analyst revisions, earnings forecasts, target price, abnormal returns, momentum, reversals

JEL Classification: G00

Suggested Citation

Govindaraj, Suresh and Livnat, Joshua and Savor, Pavel G. and Chen, Zhao, Large Price Changes and Subsequent Returns (October 15, 2014). Journal of Investment Management (JOIM), Third Quarter 2014, Available at SSRN: https://ssrn.com/abstract=2510610

Suresh Govindaraj (Contact Author)

Rutgers University - Rutgers Business School - Newark and New Brunswick ( email )

1 Washington Park
Room #934
Newark, NJ 07102
United States

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

affiliation not provided to SSRN

Zhao Chen

Independent ( email )

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