Information Shocks and Short-Term Market Underreaction

61 Pages Posted: 29 Dec 2016

See all articles by George J. Jiang

George J. Jiang

Washington State University

Xingnong Zhu

Ibbotson Associates

Date Written: June 23, 2016

Abstract

Using jumps in stock prices as a proxy for large information shocks, we provide evidence consistent with short-term underreaction in the US equity market. Strategies long (short) stocks with positive (negative) lagged jump returns earn significantly positive returns over the next one to three-month horizons. The results based on intraday jumps, especially overnight jumps, provide further evidence consistent with underreaction. The underreaction is robust to controlling for other firm characteristics, extends stock return momentum over intermediate to short horizons, and captures market underreaction to information shocks beyond earnings surprises. We further show that limited investor attention contributes to short-term underreaction.

Keywords: Information shocks; short-term underreaction; stock return momentum; earnings announcement effect; limited investor attention

JEL Classification: G12; G14

Suggested Citation

Jiang, George and Zhu, Xingnong, Information Shocks and Short-Term Market Underreaction (June 23, 2016). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2891216

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Xingnong Zhu

Ibbotson Associates ( email )

225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States

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