Gradual Incorporation of Information into Stock Prices: Empirical Strategies

30 Pages Posted: 3 Sep 2000 Last revised: 30 Dec 2022

See all articles by Sara Fisher Ellison

Sara Fisher Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics

Wallace P. Mullin

George Washington University - Department of Economics

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Date Written: October 1997

Abstract

This paper explores environments in which either the revelation or diffusion of information, or its incorporation into stock prices, is gradual, and develops appropriate estimation techniques. This paper has implications both for event study methodology and for understanding the process by which stock prices incorporate information. Two environments are highlighted. First, information is often not revealed in one announcement but rather through a process of gradual public revelation, which may not be completely observable by a researcher. We examine the effect of the evolution of the Clinton health care reform proposal on pharmaceutical stock prices. We estimate the expected path of market-adjusted pharmaceutical prices over September 1992- October 1993 by isotonic regression, and find that the major portion of the decline in stock prices occurred gradually, and did not correspond to identified news events. Second, the trading process itself may incorporate private information into stock prices gradually. That is an implication of the Kyle (1985) model, in which one or a small number of informed traders use their market power over their private information to maximize profits dynamically. We use the functional form predictions from Kyle in our estimation, and the results from a sample of targets of tender offers are consistent with the model.

Suggested Citation

Fisher Ellison, Sara and Mullin, Wallace P., Gradual Incorporation of Information into Stock Prices: Empirical Strategies (October 1997). NBER Working Paper No. w6218, Available at SSRN: https://ssrn.com/abstract=225976

Sara Fisher Ellison (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Wallace P. Mullin

George Washington University - Department of Economics ( email )

2201 G Street NW
Washington, DC 20052
United States

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