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Information Shocks and Short-Term Market Underreaction

Author

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  • Jiang, George J.
  • Zhu, Kevin X.
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.

Suggested Citation

  • Jiang, George J. & Zhu, Kevin X., 2017. "Information Shocks and Short-Term Market Underreaction," Journal of Financial Economics, Elsevier, vol. 124(1), pages 43-64.
    • Handle: RePEc:eee:jfinec:v:124:y:2017:i:1:p:43-64
    DOI: 10.1016/j.jfineco.2016.06.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Information shocks; Short-term underreaction; Stock return momentum; Earnings announcement effect; Limited investor attention;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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