Large one-day price changes – paper review

How do shares prices react after a very large fall or rise in prices on one day? Do prices reverse some or all of the change quickly? Most of the academic papers on large one-day price changes address the issue of whether price reversals do occur and, if they do, the extent and duration of the reversal and in what circumstances they happen.

This article presents a brief review and listing of academic papers on large one-day price moves.


In 1985 De Bondt and Thaler (1985) proposed the overreaction hypothesis, which states that most people overreact to unexpected and dramatic news events. With respect to stocks, this overreaction can cause large one-day changes in share prices, which are then followed by a reversal.

Atkins and Edward A. Dyl (1990) found that after large one-day price changes, especially in the case of declines, the market reversed quickly, but the widening of the bid-ask spread made it difficult to exploit this. A little later Turner and Weigel (1992) found no evidence of short-term market reversals after large one-day price moves. This was followed a couple of years afterwards by the, so far, most cited work on the topic Cox and Peterson (1994), which argued that any observed short-term price reversals were due to changes in the bid-ask spread. They further observed that shares with large falls continue to perform badly beyond the short-term. In other words, the overreaction hypothesis doesn’t hold.

This was largely supported by Park (1995) a year later, who found that price reversals disappeared on the following day if the average of the bid-ask prices was used. After the following day, however, the paper did find systematic abnormal reversal returns. Wong (1997) found that prices tend to rise after large one-day advances and fall after large one-day declines (i.e. no reversals), which supported Cox and Peterson (1994) and not De Bondt and Thaler (1985).

From 2001, some papers started taking a more nuanced view of this by analysing the type of news that had caused the large price move. Pritamania and Singal (2001) found that if the news relates to earnings or analyst recommendations then the 20-day abnormal returns become much larger ranging from 3% to 4% for positive events and about -2.25% for negative events. This trend of analysis was continued by Larson and Jeff Madura (2003), who found that there was overreaction to strong price rises in the absence of news (defined as news appearing in the WSJ), but no overreaction to price rises accompanied by news.

Fehle and Zdorovtsov (2003), cut straight to the chase to analyse whether money could be made in the case of large one-day declines. They found that stocks did overreact in this situation, that the subsequent reversals could be profitably traded and that trading profits were correlated with the size of the fall. Further, following on from the above, they found that the reversals were greater for those stocks with no concurrent associated news. This was consistent with Daniel, Hirshleifer and Subrahmanyam (1998) and Hong and Stein (1999).

Sturm (2003) focused on the asymmetry of reactions: finding that large price decreases are followed by positive returns (i.e. reversal), but large price increases do not drive positive or negative abnormal returns. Ma, Tang and Hasan (2005) found a difference in behaviour between markets with strong evidence of price overreactions for Nasdaq stocks but not NYSE. This was followed by Zawadowskia, Andor and Kertész (2006) who did find significant reversal behaviour but that, while widened bid-ask spread for NYSE stocks eliminated profit potential, this was not the case for Nasdaq stocks where the bid-ask spread was unchanged offering the potential for significant short-term profits.

With respect to the UK market, Mazouz, Joseph and Joulmer (2009) found continuation, rather than reversal, behaviour after large moves. And then Gu (2013) found that the market does usually reverse its direction in the day after the large move.


INDEX (of papers listed below)

[Papers listed in reverse date order; indicates major paper.]

  1. Predictability of Big Day and Profitability Thereafter [2013]
  2. Abnormal stock returns, for the event firm and its rivals, following the event firm’s large one-day stock price drop [2011]
  3. Stock price reaction following large one-day price changes: UK evidence [2009]
  4. Is reversal of large stock-price declines caused by overreaction or information asymmetry: Evidence from stock and option markets [2009]
  5. Short-term market reaction after extreme price changes of liquid stocks [2006]
  6. The Stock Price Overreaction Effect: Evidence on Nasdaq Stocks [2005]
  7. What Drives Stock Price Behavior Following Extreme One-Day Returns [2003]
  8. Investor Confidence and Returns Following Large One-Day Price Changes [2003]
  9. Large Price Declines, News, Liquidity, and Trading Strategies: An Intraday Analysis [2003]
  10. Return predictability following large price changes and information releases [2001]
  11. A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets [1999]
  12. Investor Psychology and Security Market Under- and Overreactions [1998]
  13. Abnormal Stock Returns Following Large One-day Advances and Declines: Evidence from Asia-Pacific Markets [1997]
  14. A Market Microstructure Explanation for Predictable Variations in Stock Returns following Large Price Changes [1995]
  15. The Influence of Organized Options Trading on Stock Price Behavior following Large One-Day Stock Price Declines [1995]
  16. Stock Returns following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance [1994]
  17. Daily Stock Market Volatility: 1928–1989 [1992]
  18. The Reversal of Large Stock-Price Decreases [1991]
  19. Price Reversals, Bid-Ask Spreads, and Market Efficiency [1990]
  20. Further Evidence on Investor Overreaction and Stock Market Seasonality [1987]
  21. Does the Stock Market Overreact? [1985]


Predictability of Big Day and Profitability Thereafter
Authors [Year]: Anthony Yanxiang Gu [2013]
Journal [Citations]: Journal of Accounting and Finance , 13(5), pp63-73
Abstract: Significantly higher volume in a few day window combined with significantly higher opening may signal a big up day. Negative relationships between return and volume over a three-day window may signal the danger of a big down day. Opening prices of all the big down days are significantly higher than the day’s low and close, and opening prices of all the big up days are significantly lower than the day’s high and close. The market usually reverses its direction in the day after the big day. A strategy is developed for excess returns.
Ref: AA663

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