Equity Market Reaction to Sharp Price Changes: Evidence from Poland
We examine investors’ reaction to sharp price changes using two equity market indices in Poland: WIG and WIG20. Using daily market returns for the two indices from April 1991 and April 1994 to November 2012, we identify the event days as the days where market indices exhibited positive or negative daily price changes of 3 percent or more as well as two and three standard deviations from the mean of the market returns. By following the market behaviour through price trend for 30 days after the event days, two conclusions can be reached: (a) The arrival of unexpected news that cause sharp price changes impacts volatility of market indices, and (b) the subsequent price adjustments after the initial sharp price changes take an upward corrective pattern only after the initial negative price changes, but not after positive price changes.
Full text: PDF
Ajayi, R., and Mehdian, S. M., 1994a. Rational Investor’s Reaction to uncertainty: Evidence from the World’s Major Markets. Journal of Business Finance and Accounting, 21, 533-545.
Ajayi, R., and Mehdian, S. M., 1994b. Tests of Investors Reactions to Major Surprises. Journal of International Financial Markets, Institutions and Money, 4(1-2), 115-128.
Allen, D. E., and Prince, R., 1995. The winner/loser hypothesis: Some preliminary Australian evidence on the impact of changing risk. Applied Economics Letters, 2, 280–283.
Alonzo, A., and Gonzalo, R., 1990. Overreaction in the Spanish Equity Market. Journal of Banking and Finance, 14(2-3), 469-481.
Amini, A., Gebka, B., Hudson, R., and Keasey, K., 2013. A Review of the International Literature on the Short Term Predictability of Stock Prices Conditional on Large Prior Price Changes: Microstructure, Behavioral and Risk Related Explanations. International Review of Financial Analysis, 26, 1-17.
Atkins, A., and Dyl, E., 1990. Price Reversals, bid-ask Spreads, and Market Efficiency. Journal of Financial and Quantitative Analysis, 25, 535-547.
Ball, R., and Kothari, S. P., 1989. Nonstationary Expected Returns: Implication for Tests of Market Efficiency and Serial Correlation in Returns. Journal of Financial Economics, 25, 51-74.
Bowman, R., and Iverson, D., 1998. Short-run Overreaction in the New Zealand Stock Market. Pacific-Basin Finance Journal, 6(5), 475-491.
Brailsford, T., 1992. A Test for the Winner–loser Anomaly in the Australian Equity Market: 1958–87. Journal of Business Finance and Accounting, 19(2), 225–241.
Bremer, M. A., and Sweeney, R. J., 1991. The Reversal of Large Stock Price Decreases. Journal of Finance, 46, 747-754.
Brown, K. D., Harlow, W. V., and Tinic, S. M., 1988. Risk Aversion, Uncertain Information, and Market Efficiency. Journal of Financial Economics, 22, 355-385.
Brown, K. D., Harlow, W. V., and Tinic, S. M., 1993. The Risk and Required Return of Common Stock Following Major Price Innovations. Journal of Financial and Quantitative Analysis, 28, 101-116.
Chan, D. S., 1996. A Study of Short-run Overreaction in the Hong Kong Stock Market. Asian Review of Accounting, 4, 1-14.
Chan, K. C., 1988. On the Contrarian Investment Strategy. Journal of Business, 61, 147-163.
Chen, C. R., and Sauer, D. A., 1997. Is Stock Market Overreaction Persistent Over time? Journal of Business, Finance, and Accounting, 24(1), 51-67.
Ciobanu, A., Mehdian, S., and Perry, M., 2008. An Analysis of Investors’ Behavior in the Romanian Capital Market. Journal of Accounting and Management Information Systems, 25, 25-50.
Da Costa, N. C. A. J., 1994. Overreaction in the Brazilian Stock Market. Journal of Banking and Finance, 18(4), 633-642.
DeBondt, W. F., and Thaler, R. H., 1985. Does the Stock Market Overreact? Journal of Finance, 40, 793-805.
DeBondt, W. F., and Thaler, R. H., 1987. Further Evidence on Investor Overreaction and Stock Market Seasonality. Journal of Finance, 42, 557-581.
Diacogiannis, P. G., Patsalis, N., Tsangarakis, N. V., and Tsirilakis, E. D., 2005. Price Limits and Overreaction in the Athens Stock Exchange. Applied Financial Economics, 15(1), 53-61.
Didier, T., and Schmukler, S., 2013. The Financing and Growth of Firms in China and India: Evidence from Capital Markets. Policy Research Working Paper 6401. Washington, DC: World Bank.
Gaunt, C., 2000. Overreaction in the Australian equity market: 1974-1997. Pacific-Basin Finance Journal, 8(3-4), 375-398.
Gilmore, G. C., and McManus, M. G., 2003. Random-walk and efficient tests of Central European Equity Markets. Journal of Managerial Finance, 29(4), 42-61.
Howe, J. S., 1986. Evidence of Stock Market Overreaction. Financial Analysts Journal, 42, 74-77.
Kadiyala, P., and Rau, P. R., 2002. Investor Reaction to Corporate Events Announcements: Under-Reaction or Over-reaction? Journal of Business, 77, 357-386.
Ketcher, D. N., and Jordan, B. D., 1994. Short Term Price Reversals Following Major Price Innovations: Additional Evidence on Market Overreaction. Journal of Economics and Business, 46(4), 307-324.
Kolodko, G. W., 2009. A two-thirds of success. Poland's post-communist transformation 1989–2009. Communist and Post-Communist Studies, 42(3), 325-351.
Lasfer, M. A., Melnik, A., and Thomas, D., 2003. Short-term Reaction of Stock Markets in Stressful Circumstances. Journal of Banking and Finance, 27, 1959-1977.
Mazouz, K., Joseph, N. L., and Palliere, C., 2009. Stock Index Reaction to Large Price Changes: Evidence from Major Asian Stock Indexes. Pacific-Basin Finance Journal, 17, 444-459.
Mehdian, S., Nas, T., and Perry, M., 2004. An Examination of Investor Reaction to Unexpected Political and Economic Events in Turkey. Global Finance Journal, 18(3), 337-350.
Nam, K., Pyun, C. S., and Avard, S. L., 2001. Asymmetric Reverting Behavior of Short-Horizon Stock Return: An Evidence of Stock Market Overreaction. Journal of Banking and Finance, 25(4), 807-824.
Nivet, J. F., 1997. Stock markets in transition: The Warsaw Experiment. Economics of transition, 5(1), 171-183.
Park, J., 1995. A Market Microstructure Explanation for Predictable Variations in Stock Returns Following Large Price Changes. Journal of Financial and Quantitative Analysis, 30, 241-256.
Rezvanian, R., Rao, N., and Nyadroh, E., 2012. Investors’ Reaction to Sharp Price Changes: Evidence from India. Journal of Accounting and Finance, 12(2), 142-162.
Rezvanian, R., Turk, R. A., and Mehdian, S. M., 2011. Investors’ Reaction to Sharp Price Changes: Evidence from Equity Markets of the People’s Republic of China. Global Finance Journal, 22, 1-18.
Richards, A., 1996. Volatility and Predictability in National Stock Markets: How do Emerging and Mature Markets Differ? IMF Staff Papers, 43(3), 461-501.
Richards, A., 1997. Winner-Loser Reversals in National Stock Market indices: Can They Be Explained? Journal of Finance, 52, 2129-2144.
Rockinger, M., and Urga, G., 2000. The Evolution of Stock Markets in Transition Economies. Journal of Comparative Economies, 28(3), 456-472.
Stoica, O., Mehdian, S. M., and Diaconasu, D. E., 2013. Changes in Investors’ Reaction to Uncertainty after the 2008 Global Financial Crisis: The Case of Central and Eastern European Countries. Transformations in Business & Economics, 2(29), 148-159.
Wang, J., Burton, B. M., and Power, D. M., 2004. Analysis of the Overreaction Effect in the Chinese Stock Exchange Market. Applied Economics Letters, 11, 437-442.
Wang, K. H., Lonie, A. A., and Power, D. M., 2000. An Analysis of Short-run Overreaction in Three Far Eastern Markets. In G. Meijer (Ed.), The Maastricht ISINI papers. Maastricht: Shaker Publishing.
Worthington, A. C., and Higgs, H., 2004. Random Walks and Market efficiency in Europe Equity Markets. Global Journal of Finance and Economics, 1(1), 59-78.
Yeh, Y., and Lee, T., 2000. The Interaction and Volatility Asymmetry of Unexpected Returns in the Greater China Stock Markets. Global Finance Journal, 11, 129-149.