Short-term market reaction after extreme price changes of liquid stocks

Abstract

In our empirical study, we examine the price of liquid stocks after experiencing a large intraday price change using data from the NYSE and the NASDAQ. We find significant reversal for both intraday price decreases and increases. The results are stable against varying parameters. While on the NYSE the large widening of the bid-ask spread eliminates most of the profits that can be achieved by a contrarian strategy, on the NASDAQ the bid-ask spread stays almost constant yielding significant short-term abnormal profits. Furthermore, volatility, volume, and in case of the NYSE the bid-ask spread, which increase sharply at the event, decay according to a power-law and stay significantly high over days afterwards.