Information Shocks and Short-Term Market Underreaction

George J. Jiang*, Kevin X. Zhu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

46 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)43-64
Number of pages22
JournalJournal of Financial Economics
Volume124
Issue number1
DOIs
Publication statusPublished - 1 Apr 2017

Keywords

  • Earnings announcement effect
  • Information shocks
  • Limited investor attention
  • Short-term underreaction
  • Stock return momentum

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