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An event study of price movements following realized jumps

Hossein Asgharian, Mia Holmfeldt and Marcus Larson* Department of Economics, Lund University

Abstract Price jumps are mostly related to investor reactions to unexpected extreme news. We perform an event study of price movements after jumps to analyze if investors’ reactions to news releases are affected by psychological biases. We employ the recent non-parametric methods based on intra-daily returns to identify price jumps. This approach enables us to separate large price movements that are related to unexpected news from those merely caused by periods of high volatility. To increase the likelihood of capturing news related price movements, we take also into consideration the trade volumes around the jump events. To increase the robustness of the results we analyze a set of different model specifications. In general, we find indications of investor pessimism, as our results show a strong price reversal after negative jumps, except for the bull market in 1997–2000 when investors tend to overreact to good news and underreact to negative news.

Keywords: Behavioral finance; price jumps; event study; bi-power variation; high-frequency data. JEL classifications:.

Department of Economics, Lund University, Box 7082 S-22007 Lund, Sweden. Hossein.Asgharian@nek.lu.se , Mia.Holmfeldt@nek.lu.se and Marcus.Larson@nek.lu.se We are very grateful to Jan Wallanders och Tom Hedelius stiftelse for funding this research.

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1. Introduction
The volatility or total price variation can be divided in a smooth and systematic component and a jump component. Recent developments provide strong econometric devices for measuring these different components (see for example Barndorff-Nielsen and Shephard (2004, 2006)). The ability to separate jumps from the continuous part of price variations makes it possible to separate large price movements that are related to unexpected news from those merely caused by periods of high volatility. This can help us to consistently analyze investor behavior around a news release. The traditional models in finance assume that investors behave rationally when they receive new information, such that the prices in the financial market always reflect the true fundamental asset values. However, investors’ overconfidence, optimism or pessimism may induce a deviation between the observed market prices and what would be expected if the price setting were rational. Investors trading psychology, such as overconfidence and optimism, or their anxiety and pessimism may cause overreaction/underreactions to the news. The overreaction to the information pushes prices up/down too far relative to the assets fundamental value. This inefficient pricing may be temporary and subsequent trades pull the prices back to their correct level. This possible scenario of reverting trend after the abnormal win/loss is usually denoted as reversal. An inverse scenario is investors’ underreaction to the news. The underreaction can be motivated as a result of the investors’ conservatism causing an insufficient initial jump and a subsequent convergence toward the fundamental level. The overreaction and underreaction are not necessarily similar for the good news and bad news. For example, pessimists may overreact to the bad news and underreact to the good news.

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Investment strategies based on overreaction/underreaction, such as contrarian and momentum strategies, have a long tradition in finance. It has been documented by a number of researches that the contrarian effect is significant for long (5 years) and short (daily up to one month) horizons, see e.g. De Bondt and Thaler (1985, 1987) and Fehle and Zdorovtsov (2003). The latter authors find that US firms with a large price fall during a trading day usually experience an overnight price adjustment. In contrast the momentum effect has been found on shorter horizons, ranging from 3 month to 1 year (see e.g. Jagadeesh and Titman (1993, 2001). From an investor’s perspective, it is important to understand the source of the success for such investment strategies. Various explanations have been proposed about the profitability of the contrarian strategy. Shortterm reversals are often explained by bid-ask spreads or lead lag effects between stocks (e.g. Jagadeesh and Titman (1995) and Lo and MacKinlay (1990)). The explanations for longer-term reversals are often based on time-variation in expected returns (Ball and Kothari (1989)). The momentum effect is, on the other hand, often traced back to a gradual response to new information by the market. Chan et al. (1996) find that a substantial proportion of the momentum effect is concentrated around earnings announcements. Our study is related to the behavioral finance literature and analyses jumps from the viewpoint of the investors’ psychology. The purpose is to perform an event study on the price movements following jumps to investigate dominating behaviors in the market after news arrivals. To increase the likelihood of capturing price movements that are related to unexpected extreme news, we impose restriction in the trading volume, when defining the jump events. We use a market model to control for the changes in the stock prices that are related to the general market movements. We try to increase the reliability and robustness of the results by examining different model specifications.

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We find strong evidence of investors’ overreaction to bad news and underreaction to good news in the bear market examined. When market conditions are good we observe an overreaction to good news while some negative jumps are likely to steam from underreaction. The significant pessimism observed in the market from September 2000 to March 2003 was to some extent carried over into the later part of our sample, although the market was upward trending. Our results suggest that both contrarian and momentum effects might be attributed to investors reacting differently to news depending on the current market conditions. The remainder of the paper is organized as follow. Section 2 describes the identification of realized jumps. Section 3 describes the data and outlines the event study methodology used. Section 4 reports our empirical finding while section 5 concludes.

2. Non-parametric jump estimation
We assume the logarithmic price of a financial asset consists of two sources, one diffusive part and one discontinuous part. To detect jump events, we use a non-parametric jump detection test mainly developed in a number of papers by Andersen and Bollerslev and Barndorff-Nielsen and Shephard. The test relies on the quadratic variation of such a price process, which can be consistently estimated by the sum of squared intra-daily returns,
RVt = ∑ rt 2j ,
j =1 M

→ QV = C + J

p

as M → ∞.

(1)

This realized variance (RV) estimator encompasses both the variation due to the diffusive component as well as the variation caused by the discontinuous price movements, the jumps.

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Due to sampling errors. Andersen et al. j − 2 ⎝ M − 2 ⎠ j =3 → C p as M → ∞. t α (5) This might be due to market frictions such as price discreteness. an estimator of the variation due to the jumps is easily obtained by the difference between the RVt and the BVt estimators. (2) where µ1 is equal to E [ Z ] with Z ~ N (0. p (3) This estimator consists of the sum of all squared intra-daily jumps in the price and must hence be non-negative. is the realised bipower variation (BV) estimator. a number of jump test statistics have been developed by e. Barndorff-Nielsen and Shephard (2004a). Following this framework. j rt . TQt BVt − 2 ) { } → N (0. bid-ask bounce or non-synchronous trading etc. (2007) and Huang and Tauchen (2005). Hence the realized jump component is obtained by. the empirically estimated Jt might be non zero even in the absence of jumps during time period t. 2 1 5 . (4) where TQt is called the tripower quarticity and is measuring the variance of the variance2.1) p as M → ∞. The TQ estimator is robust to jumps in the price process and was defined in Barndorff-Nielsen and Shephard (2004b). although robust to the variation due to jumps.A similar estimator.g. Zt = M J t RVt −4 1 (µ + 2 µ1− 2 − 5 max 1. The jump robustness characteristic is achieved by the sum of adjacent multiplied absolute intra-daily returns.1) . J t = RVt − BVt → J.1 We chose to rely on the ratio statistic due to its finite sample properties.{Z >Φ −1 }. ⎛ M ⎞M BVt = µ1− 2 ⎜ ⎟∑ rt . For a given significance level the test statistic helps to separate the jumps from the continuous variation otherwise mistakenly incorporated into the jump component. As a consequence. J tα = (RVt − BVt )I t .

To check the reliability of the high frequency data we carefully compare all the computed daily returns with data collected from Datastream. We choose the 5-minute sampling frequency in order to strike a balance between information and 3 Data is obtained from www. In addition we found insufficient accuracy for some of the remaining assets in the beginning of the sample. The sample ranges from April 4. In the next section we use this information to implement an event study of the price movements after such non-normal change. Daily returns are calculated using the log closing prices and intra daily returns are based on the log price nearest every 5-minute time stamp. This is achieved by interpolating the high frequency prices using a previous tick method.com 6 . t −1 (6) This framework allow for a non-parametric decomposition of total price variation.price-data. Our estimate of returns relies on equidistant prices. α is the significance level and I t indicates the event of a jump occurrence during time period t. Eight assets are excluded due to an overall suspicion of poor data accuracy.where Φ is the cumulative density function of a standard normal distribution. The final continuous price variation is obtained by Ct = BVt I t . The resulting sample consists therefore of 92 individual assets. one due to normal changes (smooth variation) and one due to non-normal changes (jumps).{Z < Φα } . 3.{Z − > Φ α1 t } + RVt I t . Index return data are obtained from Datastream. Data and methodology The data used is high frequency transaction prices for the individual stocks included in the S&P 100 index3. 1997 or company inception to Mars 16. As a result we exclude days with insufficient trading and erroneous price quotes. 2007.

A too high sampling frequency will induce spurious jumps due to market frictions while a too low sampling frequency will lead to poor properties of the test statistic. Hence. Volume restriction: To increase the possibility of capturing price movements that are related to unexpected extreme news and hence to a great extent information driven price movements. We only accept an identified jump as an event if more than 2/3 of the returns on that day are different from zero. To circumvent this in the event study we only consider jump days where there are sufficient amount of trading activities. A comparison between the result before and after this restriction shows a small outlier effect. Inactive trading restriction: The estimators that constitute the test statistic are vulnerable to long time periods with no price changes. we impose a volume restriction in the event study. positive or negative. The expected normal volume is estimated as the average volume in a window surrounding the jump date. 7 . To decrease the risk that the expected normal volume is affected by the jump event we use the average over a 22-day window including days -13 to -3 and +3 to +13. Filtering outlier returns: To insure that a few number of observations cannot dominate the results. We identify a jump date as an event day if the trade volume on that date is above an expected normal volume. we exclude outlier returns (values approximately outside 1% confidence interval) when estimating the abnormal returns for the event window.4 In our event study we investigate ex post realized returns following. realized jumps using the identification scheme outlined in section 2. To further limit ourselves to jumps that are information driven we impose the following set of restrictions.bias when identifying the jumps. we choose to exclude the outliers in our estimations. In order to detect the return associated with jumps we first classify the direction of the jump of asset j on jump day t as. 4 The result of the outlier analysis is not reported but is available on request.

We divide ARt.t dir ( J t .dir ( J t .t | rt i . rt +j = {rt . j is positive and -1 if it is negative. j − > Φ α1 } = 1} (7) where S is a sign function indicating +1 if rti . j ) < 0} (8) The abnormal returns are calculated by subtracting the expected normal returns from the actual returns in days following a jump event. j s. Cumulative abnormal returns ( CARth.K. Estimates of αj and βj are obtained from the following ordinary least squares regression. rt . one equally weighted index consisting of the individual assets in the sample and the S&P 100 index5. j ) (9) E(rt. j − E ( rt . j ) = S{rt i . j = α j + β j rmt + ε t (11) We exclude the trading week after the jump day in our estimation of α and β. r = {rt .j) is the expected normal return of asset j at time t conditioned on information that is unrelated to the jump days. ARt . j − t.t dir ( J t . j | and i∈{1. 5 8 . ˆ ˆ E (rt . We use the market model to calculate the expected normal returns. j ) are then calculated for each asset j as. M } I t . Then we identify a positive and a negative jump return as. j . rmt. j ) = α j + β j rmt (10) We choose two different proxies for the market return. The S&P 100 index is obtained from Datastream. j | = max | rt i . j s. We also considered high frequency index futures of the S&P 500 with similar results in our analysis. j {Z t. j = rt .j into positive and negative abnormal returns associated with the sign of the related jump. j ) > 0} s.

1. 6 9 . including only those assets that have a significant jump. CARsh = ws (CARth.100}). J )′ (13) Aggregation through time is achieved by summing the CAR sh over the S number of jump events.K. ws. j t =1 h (12) We choose an event window. up to 100 days after the jump event (h={1. The test statistic of the null hypothesis of no abnormal return is defined as. On each day we define a N×1 vector of weights. CARth.…. We start by calculating the portfolio variance on each event day by ⎞ ⎛ h ⎟ ⎜ ( Rms − R m ) 2 ∑ ⎟ ⎜ h2 ~ s =1 ⎟ × Vs Vs = ⎜ h + + ′ ⎛ ⎞⎟ ⎜ ws L ′ ws ⎜ ∑ ( Rmt − R m ) 2 . Since the parameters of expected returns are estimated with errors we mainly use the prediction error variance to estimate the t-values.CARth. j = ∑ ARt . The aggregate cumulative abnormal returns across securities are then calculated as. h. We find similar result for at portfolio where the weights are dependent of the jump size. CAR s th = se(CARsh ) where CAR s is the mean of the s number of CAR’s. K .6 We use the index s for event days where we observe a jump and t for all calendar days. ∑ ( Rmt − R m ) 2 ⎟ ⎟ ⎜ ⎜ t ∉s ⎟⎟ ⎜ t ∉s J ⎝ j ⎠⎠ ⎝ h h (14) (15) ′ Vs = ws Σws We use an equally weighted portfolio in this study.

The cross-sectional variance is defined as. The OLS regression in equation (11) is then estimated separately for the corresponding sample while the residual covariance matrix is assumed to be constant for the entire period. L is a N×1 vector with the sum of all the remaining days. which assumes the same variance for all the abnormal returns and also ignores the fact that the estimated parameters of the market model contain error. The above test procedure is adopted for positive as well as negative event days. se(CARsh ) = S −1 ∑Vs s =1 S ~ (16) An alternative way to estimate the variance is to calculate the cross-sectional variance. ws is defined as before and finally Σ is the variance-covariance matrix of the residuals from the OLS regression in equation (11). R m is the mean market return. The standard error for the cumulative abnormal return aggregated over all the events is then calculated as. se(CARsh ) = S − 2 ∑ (CARsh − CAR s ) h s =1 S (17) The test for cumulative abnormal returns after a jump event is implemented for three different sub-periods in addition to the entire sample.where sj denotes the jump days plus an additional trading week after the jump event for asset j. 10 .

05%. The skewness on average is not considerably large. In the top panel it shows the number of observations across assets and 11 . Analyses A.4. although a much more moderate.62%. the average standard deviation in the third period is about half of that in the two other periods. The trade volume is also larger in the third period comparing to the rest of the sample. It is worth noting that the daily return volatility of the S&P100 in the third period is around 0. This is also supported by the estimated average realized variance and bipower variance. The stock prices have on average been less volatile during the third period.06% while the value for the second subsample is -0. The first period covers the bull market from 1997 to the end of August 2000. The second period is characterized by falling stock prices. ranging from September 2000 to March 2003. Finally. It is interesting to note that the variation induced by jumps in the first period is about four times that of the third period. Table 2 shows some cross sectional descriptive statistics of the estimated jumps for the different sub-periods examined.31% and 1.58% respectively). The cross-sectional average of the daily mean stock returns over the entire sample is equal to 0. the third period is also an upmarket period. We divide the entire sample into three sub periods. Analysis of jump Figure 1 illustrates S&P100 index under the period 199704-200703.03%. starting March 2003 and ending March 2007. however it is slightly more negative in the second period (the bear market). Table 1 shows a summary of return statistics. Both the first and the third sub-periods have an average daily mean return of about 0. The relatively large average kurtosis in all the periods signals for a possible outlier problem. which is much lower than the index return volatility in the first and second period (1. characterizing the fourth period as an upmarket period with low variance and few unexpected extreme news.

which is displayed on the remaining rows both for the cross-sectional average as well as the minimum and maximum values. For an overview of the impact of our restriction on the number of observations for each stock. One obvious issue is whether stocks with higher market risk. From the figure we can see that the positive and negative jump intensities are almost the same. i. and from the last part it is evident that the volume restriction reduces the jump frequency by roughly a third. It is interesting to note the strong time variation in the jump frequency across the three sub-periods. However. or exactly 7. displays the total number of jumps for all traded stocks during the specific sample period.e. An interesting question is whether there are any common factors influencing the individual jump intensities. In Table 3 we report the correlation matrix between the cross-sectional jump frequencies and some potentially important factors. Do some types of assets jump more frequently than the others? In other words. The following two panels show some descriptive statistics about the cross-sectional jump frequency.time periods. However. It is evident that some.19 does not support this conjecture. all stocks are traded although not all from the start. in each section. both with and without the volume restriction imposed. 12 . During the second and third sub-periods. From Table 2 it is evident that the jump frequency not only varies a lot over time but also exhibit a large cross-sectional spread. we want to see if some stocks are more exposed to under. Figure 2 illustrates the jump frequency for different firms before and after imposing the volume restriction for all stocks. as the length of the sample periods is different it is more interesting to look at the jump frequency. The first period is the most jump-intensive time period and moving forward in time the jump intensity declines. are more likely to jump.or overreactions than the other stocks. higher market beta. stocks are not contained in the first sub-period. a negative and small correlation coefficient of -0. The first row. see the appendix. Imposing the volume restriction will by definition reduce the number of jumps.

The small and insignificant correlation coefficient suggests no such a relation.7 The figure shows a clear increase in the average volume around the jump events. The results indicate during which time-period we observe most simultaneous jumps among the stocks. The values are computed before imposing the volume restriction to avoid an overestimation of the average volume in event date. The result is stable over all three sub-periods as well as the entire sample. The maximum volume is reached at day 0 which is the jump day. We use the bipower variation as the measure of price volatility in order to filter out the variation that is caused by jumps. during end of April 1997. In Figure 3 we show the number of days with simultaneous jumps. if we condition the jump frequency of the firms’ book-to-market ratio (b/m) we find that those with high b/m tend to have higher jump frequency. At most we find 15 individual stocks experiencing a jump during the same trading day. The same goes for the idiosyncratic price variations. i. On the majority of the jump days we observe between 1 or 5 simultaneous jumps. The average volume around jump dates is illustrated in Figure 4. The highest concentration of simultaneous jumps is found in the first and the last sub-periods. What is more interesting is that conditioned on the size of the firms. One possible explanation might be that large firms tend to be more closely monitored by market participants who hence might have better information and expectations about future developments compared to smaller firms. we find that smaller firms tend to jump more frequently. On the other hand. The results are similar both with and without the volume restriction.We then investigate if high volatility stocks tend to jump more frequently. for which we obtain an insignificant. negative correlation with the jump frequency.e. Table 4 shows the number of days with simultaneous jumps as a percentage of the total number of trading days in each sample. after imposing the volume restriction. 7 13 . This shows that the identified jumps are We have also computed the values without imposing the transaction restriction when identifying jumps. The estimated average volume around the event date is robust to this restriction and exhibits almost the same pattern. when different firms jump in the same day.

B.associated with the arrival of unexpected news to the market. As extreme returns we define the returns in the upper/lower quantiles.50. The average correlation between the bipower volatility and the positive and negative jumps is 0. As Figure 5 shows the distribution of the jump events over time is much smoother compared to the extreme events. when we can simply look at the extreme returns in the market. Event study Table 5 presents the average return and average abnormal return on jump days and one day after. The increase in volume may hence be due to speculations of market participants before news release. A comparison with the bipower volatility shows that the extreme returns are mostly gathered in the periods when the systematic volatility of the market is very large. such that the number of extreme positive/negative returns is equal to the number of identified positive/negative realized jumps. Our conjecture is that the extreme returns may sometimes be a result of large market volatilities instead of the reactions to unexpected or extreme news. In figure 5 we compare the identified jumps. The mean returns of the positive jumps are in absolute value larger than that of the negative jumps in the first and the third sample whereas the result is reversed for the second sample. while the average correlation between extreme returns and the positive and negative extreme returns is slightly above 0. the extreme returns and the cross-sectional average of the estimated bipower volatilities (the smooth part of price variation). The increase in the volume before the jump days may show that the jump occurrences are mostly related to the expected release dates.08. These results confirm our conjecture that extreme returns are not sufficient to capture market reactions to unexpected news. This is not surprising as the 14 . The mean of the event day returns are around 1% in absolute value. One might wonder if it is necessary to identify jumps to examine investors’ response to the extreme news.

For the positive jumps. For the negative jumps the CAARs calculated from the extreme returns are not significant while those following jump events are significant at a 5% level. Both mean returns and mean abnormal returns of the jump days are highly significant. However. we choose to use an event window of 100 days. this might be interpreted as an indication of a conservative reaction to positive news in the down market in day 0. insignificant CAARs through the entire event window. For the negative jumps are more or less robust to the imposed restriction. i. We believe that this window is sufficiently long to capture long run price corrections after a possible underreaction/overreaction. The insignificance of the CAARs following extreme returns might indicate that extreme returns are partially due to large market volatility and partially to the 15 . which is corrected by a positive price movement in the subsequent day. Figure 7 shows that the two alternatives result in the same conclusion for the positive jumps. these values are insignificant for the day following a jump. the volume restriction results in more conservative t-values in the long run and are almost insignificant throughout the entire window. while restricted CAAR become significant after about 80 days. Since our purpose is to investigate a long run price movement after a jump. Before analyzing the final results of the event study in details we use the entire sample to examine the impact of our different choices of model restrictions on the final results. Next we examine how our results are affected by using extreme returns instead of jumps as events. We first look at the impact of the volume restriction on the results in the event study. For the latter case. there is a considerable difference between the t-values of the two alternatives. For simplicity we only report the t-values of the estimated CAAR in the robustness analysis.first and the third periods both are characterized by a positive market trend. Figure 6 plots the t-values of the estimated CAAR with and without volume restriction when identifying jumps.e. except after the positive jumps in the second sample (down market).

The negative CAARs 16 . For the first sub-period. we compare the t-values estimated by the two alternative variance estimations. The estimated CAARs for negative jumps are close to zero in the beginning and become significantly negative only in the end of the event window (approximately day 80 and onward). Finally. Figure 8 shows that our results are not affected by the choice of the benchmark index. The estimations are based on the value weighted market index and the prediction error variance. As the figure shows the two alternatives give almost the same results for both the negative and positive jumps. However. Since the de-listed firms are supposed to perform worse than the survived firms it may induce an upward bias in our estimated CAAR. which is corrected in the subsequent trades. constructed based on the existing firms. in Figure 9. we also use an equally weighted index. either the prediction error variance or the cross-sectional variance. Figure 10 illustrates the estimated CAAR and the related 95% confidence interval for positive and negative jumps for these different time periods. the S&P100 index as a proxy for the market portfolio and the t-values are calculated using the prediction error variance. we cannot observe jumps occurred for de-listed firms. To control for this possibility.arrival of the unexpected news. i. The subsequent price movements may therefore vary by events and do not show any systematic pattern. the high frequency database employed in this study consists of firms included in the S&P100 at the end of the sample period.e. the estimated CAARs after positive jumps are negative and become significant after about 20 days. This may show an overreaction to positive news. while these firms affect the returns of our benchmark index. We employ the following model in the rest of the event study: the model with volume restriction. The stock included in the S&P100 index may vary over time. characterized by an equity bull market. Consequently. The analysis is conducted for the entire sample as well as the three sub-periods. as benchmark index. S&P100.

The results for the entire sample period show no significant effect after positive jumps but a significant positive effect after negative jumps. The estimated CAARs of the second sample. significant negative CAARs following negative jumps. 17 .e. The significantly positive CAARs of the entire period for the negative jumps are most likely driven by the results of the second period. The overreaction to the positive news and underreaction to the negative news may reflect the known optimism dominating in the up market between in 1997-2000. are positive and strongly significant throughout the event window for both negative and positive jumps. This finding indicates a strong underreaction to the good news and overreaction to the bad news. Despite the fact that the third period experienced a positive market trend. Since the CAARs following the positive jumps have different signs in the first and the second periods. as they tend to overreact to negative news but react “normally” to positive news.following the negative jumps indicate a possible underreaction to the bad news. i. characterized by a bear market. it still shows an overreaction to negative news. but the CAARs after positive jumps are insignificant. although the results are dependent on the economic state. the combined effect over the entire sample result in insignificant CAARs. Regarding the economic depression and the serious worldwide political crises in the major part of the second period. this scenario is in accordance with the deep pessimism prevailed in that period. it seems as if investors react asymmetrically to positive and negative unexpected news. These results signal some evidence of overall investor pessimism. Altogether.

In such market. positive jumps are followed by negative cumulative average abnormal returns (CAAR) after about 20 days. between 1997 to August 2000. A comparison of the extreme returns with our measure of continuous volatility indicates that using extreme returns might not be sufficient to capture market reactions to unexpected news. Volume is significantly higher on jump days suggesting that the identified jumps are associated with the arrival of unexpected news to the market. Part of the negative jumps on the other hand is likely to steam from investors’ underreaction to bad news. Previous studies on investor behavior and news announcements uses to a large extent extreme returns defined by some threshold as a proxy for such events. The later part of the sample is characterized by relatively lower volatility and fewer jumps but more extensive trading.5. Volume and volatility theories (see for example Andersen (1992)) propose a close relation between volume and price movement. The first sample period. The jumps are estimated using recent non-parametric methods based on intra-daily returns. Hence this period might reflect an overall optimism among the investors. Conclusion In this paper we investigate the investor behavior around large price movements resulting in discontinuities (jumps) in the prices of individual stocks. which is corrected in the subsequent trading days. In the second period from September 2000 to March 2003 which was characterized by a bear market we find significant CAAR’s for both negative and positive jumps suggesting an 18 . is characterized as a bull market. We find a considerable time variation in the contribution of jumps to total price variance during our different sub-samples. This result suggests an overreaction to positive news. We find new evidence of such relationship between the jump component and volume.

overreaction to bad news and an underreaction to good news. 19 . The results for the entire sample period show no significant effect after positive jumps but a significant positive effect after negative jumps. experienced a positive market trend we still report a significant overreaction to negative news. suggesting that the deep pessimism during the second period is carried over into the third. it seems as if investors tend to respond asymmetrically to positive and negative unexpected news although the results depend on the current market conditions. Overall. between April 2003 and March 2007. Although the third period.

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89 17.Table 1.21 3620 0.06 2.12 35.02 5% -0.96 0.04 Sample 2 95% 0.24 4.48 0.57 -0.04 -0.13 6.25 3.22 4.12 2. kurtosis.78 17.43 0.54 1.01 mean 0.79 0.09 3.15 0.86 0.43 0.00 6.99 0.65 -1.97 0.02 95% 0.91 22757 0.05 5.30 9.01 0.02 1.41 2.12 4.01 0.18 0.03 22 .36 0.92 Skewness 5.82 29068 489 0.55 -1.95 0. skewness.61 22.50 4. average realized variance (RV).01 5.98 0. average bipower variance (BV).99 0. average trading volume. standard deviation of returns.85 0.01 Sample 3 95% 5% mean 0.92 9.45 3809 0.99 2.91 4.82 3.01 9.39 -1.84 4.05 mean -0.03 2.07 -0.99 0.63 50288 0.81 3.72 3415 0.44 22. Entire 5% -0.06 1. Summary of return statistics The table shows the cross-sectional means and the related 90% confidence limits over following statistics for individual firms: average return.01 0. the percentage of total variance induced by jumps.77 1.07 -0.58 19.93 0.48 1.32 3.66 2623 0.28 1.48 Kurtosis 1.05 2.76 25512 970 0.07 Jump induced variance Average return % Stdev Sample 1 95% 5% mean 0.14 8.13 2. the percentage of total variance induced by the systematic variation and finally.99 0.61 2.40 -1.59 715 0.99 0.85 Average RV 1.26 3.81 Average BV 875 Average volume (1000$) Diffusion induced variance 0.98 0.63 0.06 3.04 0.02 10.

17 0.Table 2. Cross-sectional statistics of jump frequency The table shows the cross-sectional statistics of the jump frequencies for the different subperiods.06 23 . In the top panel it shows the number of observations across assets and time periods.67 0.79 35.32 0.68 Sample 2 3212 5.49 0.81 1.11 Sample 2 1210 2. displays the total number of jumps for all traded stocks during the specific sample period. in each section. The first row.40 4.59 Sample 1 2399 3. Entire # of observations Min observations Max observations 2501 1308 2499 Sample 1 860 0 858 Sample 2 632 299 632 Sample 3 1009 1009 1009 No volume restriction Entire # of jumps Mean jump frequency Min jump frequency Max jump frequency 14654 6.92 Sample 3 3353 3.29 8.56 33.75 11. both with and without the volume restriction.60 6.26 Sample 1 8089 12.39 Sample 3 1354 1.84 19.16 11.23 2.75 0.69 1.42 With volume restriction Entire # of jumps Mean jump frequency Min jump frequency Max jump frequency 4963 2. The following two panels show the descriptive statistics of the cross-sectional jump frequency.

00 -0.14 -0.05 1. Correlation matrix The table reports the correlation matrix between the individual firms jump frequencies and some potentially important firm specific factors. Jump freq Jump freq Beta BV Residual Var.02 -0.64* 0.11 24 .e. i.00 -0.30* 0.54* 0. the residual variance of the estimated market model.23 * Beta 1.54 * BV Residual Var.Table 3.19* 0.11 1.16 -0.89* -0.13 0. the market beta. Size B/M 1.00 -0.00 0. The correlations marked by an asterisk (*) are significant at the 5% level.00 0.00 0.18* 1. firm size and firm book-tomarket value. Size B/M 1. the average of bipower variation over time.

00 Sample 2 25.68 1.58 18.86 9.12 0. The upper limit of 25 represents the maximum number of cojumps on one trading day.19 0.00 0.90 5.00 0.12 13.36 3.00 0.92 0.02 4.00 0.81 11.16 1.08 0.44 10.03 8.00 0.00 0.63 0.04 Sample 1 0.36 2.62 10.00 0.00 0.20 0.00 0.00 0.31 21.00 0.49 9.23 2.00 Sample 1 18.23 2.00 0.10 0.08 0.00 0.12 0.78 1.12 0.49 0.44 2.00 Sample 3 30.72 5.04 0.00 0.04 21.11 0.00 0.00 0.00 0.40 5.01 14.00 0.00 0.00 0.84 13.04 12.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Entire 7.00 0.00 0.00 0.63 1. No volume restriction # of Jumps/Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 With volume restriction Sample 3 # of Jumps/Day 13.00 0.85 0.16 2.08 0.00 0.00 0.72 7.00 0.65 9.00 0.04 0.00 0.64 1.80 6.00 0.78 7.00 0.00 0.00 0.00 0.53 10.67 6.96 1.93 0.00 0.48 0.00 0.44 0.00 0.03 10. Percentage of simultaneous jump days of the total number of trading days The table shows the number of days with simultaneous jumps as a percentage of the total number of trading days in each sample.Table 4.00 0.00 0.00 0.19 2.00 0.16 0.40 0.44 0.35 7.16 0.00 0.67 8.87 13.00 0.74 18.00 0.00 0.00 0.00 0.00 0.35 0.00 0.00 0.00 0.67 2.40 11.00 0.85 2.80 0.16 7.50 0.79 4.12 0.00 0.68 4.99 10.44 9.08 0.03 14.37 21.16 0.93 0.00 0.40 0.00 0.70 6.92 19.35 0.00 25 .77 12.00 0.02 4.63 10.20 0.20 1.00 0.00 0.56 0.16 0.23 0.00 0.12 Sample 2 7.63 0.23 0.05 1.16 1.00 Entire 25.00 0.92 4.63 0.00 0.28 3.00 0.00 0.79 22.13 13.00 0.00 0.00 0.47 0.00 0.00 0.07 5.00 0.12 0.35 1.81 5.00 0.00 0.33 1.75 2.31 15.27 0.54 3.08 0.00 0.47 0.00 0.00 0.00 0.00 0.68 6.00 0.

00 -0.78 -0.16 1.06 0.01 13.97 -14.03 18.99 9.94 0.89 -0.02 -0.05 -0.16 -10. % Sample 1 mean t-value 1.29 8. where S&P100 is used as the market index.77 17.94 Sample 1 mean t-value -0. One-day returns and abnormal returns The table presents the average return and average abnormal return on jump days (t = 0) and one day after the jumps (t = 1).72 0. % Negative Jumps mean t=0 Return % Abnorm.29 -0.17 0.04 -0.58 2.60 -0.40 1.25 8.23 1.33 0.46 0.02 9. We use the market model to estimate the expected normal returns.02 -9.62 0. Ret. In identifying event days we use the estimated jumps and impose the volume restriction.03 -0.71 -0.10 Sample 3 mean t-value -0.13 0.05 0.01 -7.08 -0.04 t=1 Return % Abnorm.33 -0.89 -0.23 1.13 0.05 -0.39 -0.27 Sample 2 mean t-value -1.78 13.47 1. Ret.Table 5.04 0.36 -0.86 0.52 -0. % 26 . Positive Jumps Entire mean t-value t=0 Return % Abnorm.02 -8. Ret.51 -8.20 Sample 2 mean t-value 1.67 -0. Ret. % Entire t-value -13.06 0.17 -1.08 0.49 Sample 3 mean t-value 0.91 0.75 t=1 Return % Abnorm. The reported t-values are based on the prediction error variances.94 0.11 0.27 -6.

S&P 100 index The figure illustrates S&P100 index under the period 199704-200703. The first period covers the bull market from 1997 to the end of August 2000.1 0.5 0.0 0.7 0.6 0. The second period is characterized by falling stock prices. We divide the entire sample into three sub periods.0 1 7 99 04 1 7 99 10 1 8 99 04 1 8 99 10 1 9 99 04 1 9 99 10 2 0 00 04 2 0 00 10 2 1 00 04 2 1 00 10 2 2 00 04 2 2 00 10 2 3 00 04 2 3 00 10 2 4 00 04 2 4 00 10 2 5 00 04 2 5 00 10 2 6 00 04 2 6 00 10 27 .3 0. The third period is also an upmarket period starting April 2003 and ending March 2007.9 0. ranging from September 2000 to March 2003.Figure 1. S&P100 1.4 0.8 0.2 0.

0% 0.0% 7.0% 2. Jump frequency w ithout volume restriction All jumps 20.0% 2.0% 8.0% 2.0% 5.0% 6.0% 8.0% 12.0% 1.0% 0.0% 8.0% 4.0% 8.0% 9.0% 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Stocks 10.Figure 2.0% 18.0% 3.0% 2.0% 4.0% 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Stocks 20.0% 4.0% 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Stocks 10.0% 9.0% 18.0% 9.0% 6.0% 16.0% 1.0% 1.0% 4.0% 5.0% 0.0% 14.0% 9.0% 2.0% 12.0% 4.0% 6.0% 1 6 Jump frequency w ith volume restriction Negative jumps Frequency Frequency 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Stocks 28 .0% 5.0% 3.0% 2.0% 7.0% 0.0% 3.0% 5.0% 6.0% 0.0% 8.0% 8.0% 7. Jump frequency The figure illustrates the jump frequency for different firms before and after imposing the volume restriction.0% 4.0% 6.0% 16.0% 3.0% 0.0% 7.0% 10.0% 6.0% 1.0% 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Stocks Jump frequency w ith volume restriction All jumps Frequency Jump frequency w ithout volume restriction Positive jumps 10.0% 14.0% 1 6 Frequency Jump frequency w ith volume restriction Positive jumps Frequency Frequency 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 Stocks Jump frequency w ithout volume restriction Negative jumps 10.0% 10.

# jumps / day Entire 700 600 500 # of days 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 23 25 # of jumps No volume restriction With volume restriction No volume restriction # of days 200 180 160 140 120 100 80 60 40 20 0 1 3 5 7 9 11 13 15 17 19 21 23 25 # of jumps With volume restriction # jumps / day Sample 1 # jumps / day Sample 2 180 160 140 120 # of days # of days 100 80 60 40 20 0 1 3 5 7 9 11 13 15 17 19 21 23 25 # of jumps No volume restriction With volume restriction 50 0 1 3 5 7 9 250 200 150 100 350 300 # jumps / day Sample 3 11 13 15 17 19 21 23 25 # of jumps No volume restriction With volume restriction 29 . before and after imposing the volume restriction.e. i. Number of days with simultaneous jumps The figure shows the number of days with simultaneous jumps.Figure 3. when different firms jump in the same day.

Average volume around the jump day The figure shows the average volume around jump dates. The values are computed before imposing the volume restriction to avoid an overestimation of the average volume in event date.Figure 4. Average volume (no restriction) positive jumps 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 Eve nt w indow Average volume (no restriction) negative jumps 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 Eve nt w indow 30 .

9 45 0.4 20 0.2 10 0.6 30 0.Figure 5.2 10 0.3 15 0.4 20 0.3 15 0.0 0 -0.0 0 -0.5 25 0.2 10 0.6 30 0. The first and the second figures in the left refer to the positive jumps and positive extreme returns.8 40 0.1 5 0.1 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Ye ar 50 0.5 25 0.9 45 0.9 45 0. such that the number of extreme positive/negative returns is equal to the number of identified positive/negative realized jumps.3 15 0.2 10 0.6 30 0.2 10 0.4 20 0.3 15 0.7 35 0. As extreme returns we define the returns in the upper/lower quantiles.4 20 0.0 0 -0.4 20 0.5 25 0.8 40 0.9 45 0.8 40 0.1 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Ye ar Number of jumps Number of jumps # of extreme returns SP1 Index 00 Index # of extreme returns SP1 Index 00 50 0.5 25 0.3 15 0.2 10 0.6 30 0.0 0 -0.1 5 0.7 35 0.6 30 0.7 35 0.9 45 0.5 25 0.8 40 0.6 30 0.0 0 -0.5 25 0.1 5 0.9 45 0. 50 0.8 40 0. the extreme returns and the cross-sectional average of the estimated bipower volatilities. while the first and the second figures in the right are for the negative jumps and negative extreme returns.8 40 0. Comparing jumps.3 15 0.4 20 0.1 5 0.0 0 -0.1 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Ye ar Average BV SP1 Index 00 Average BV Average BV Index 31 Index Index Index .1 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Ye ar Average BV SP1 Index 00 50 0.1 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Ye ar 50 0.7 35 0.7 35 0.1 5 0. extreme values and bi-power variation The figure shows the identified jumps. The third figure is the estimated bipower volatilities and is placed in both right and left to make the comparison more convenient.1 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Ye ar Number of jumps Number of jumps Index # of positive Jumps SP1 Index 00 # of negative Jumps SP1 Index 00 50 0.7 35 0.1 5 0.

We use the market model to estimate the expected normal returns. The reported t-values are based on the prediction error variances. Effect of the volume restriction The figure compares the t-values of the estimated CAAR with and without volume restriction when identifying jumps. where S&P100 is used as the market index.Figure 6. Conditioning on volume positive jumps 6 5 4 t-value CAAR 3 2 1 0 -1 -2 -3 -4 1 11 21 31 41 51 61 71 81 91 101 Holding pe riod R estricted Unrestricted Conditioning on volume negative jumps 6 5 4 t-value CAAR 3 2 1 0 -1 -2 -3 -4 1 11 21 31 41 51 61 71 81 91 101 Holding pe riod R estricted Unrestricted 32 .

The reported t-values are based on the prediction error variances.Figure 7. We use the market model to estimate the expected normal returns. Jump versus extreme returns The figure compares the t-values of the estimated CAAR when using jumps versus when using extreme returns as events. where S&P100 is used as the market index. Jump vs extreme values positive jumps 6 5 4 t-value CAAR 3 2 1 0 -1 -2 -3 -4 1 11 21 31 41 51 61 71 81 91 101 Holding pe riod Jum ps Extrem e returns Jump vs extreme values negative jumps 6 5 4 t-value CAAR 3 2 1 0 -1 -2 -3 -4 1 11 21 31 41 51 61 71 81 91 101 Holding pe riod Jum ps Extrem e returns 33 .

Comparing indices positive jumps 6 4 t-value CAAR 2 0 7 -2 -4 1 11 21 31 41 51 61 71 81 91 101 Holding pe riod Value weighted index Equally weighted index Comparing indices negative jumps 6 4 t-value CAAR 2 0 -2 -4 1 11 21 31 41 51 61 71 81 91 101 Holding pe riod Value weighted index Equally weighted index 34 . constructed based on the existing firms. In the first alternative we use the S&P100 as benchmark index and in the second alternative we use an equally weighted index.Figure 8. The reported t-values are based on the prediction error variances. The choice of the index for estimating normal returns The figure compares the t-values of the estimated CAAR for two alternative estimations of the market model.

Comparing alternative t -values positive jumps 6 5 4 t-value CAAR 3 2 1 0 -1 -2 -3 -4 1 11 21 31 41 51 61 71 81 91 Holding pe riod C S variance P E variance Comparing alternative t -values negative jumps 6 5 4 t-value CAAR 3 2 1 0 -1 -2 -3 -4 1 11 21 31 41 51 61 71 81 91 Holding pe riod C S variance P E variance 35 .Figure 9. i. We use the market model to estimate the expected normal returns. the prediction error variance and the cross-sectional variance.e. where S&P100 is used as the market index. Comparing different t-values The figure compares the t-values estimated by the two alternative variance estimations. In identifying event days we use the estimated jumps and impose the volume restriction.

0% 2.0% 1.0% -1.0% -1.5% 1 11 21 31 41 51 61 71 81 91 Holding pe riod Entire pos itive jum ps 1.5% 0.0% 0.0% 4.0% 1 11 21 31 41 51 61 71 81 91 Holding pe riod Sample 3 negative jumps 4.0% CAAR -2.0% 0.5% 1.0% 0.0% 1 11 21 31 41 51 61 71 81 91 Holding pe riod CAAR Sam ple 1 ne gative jum ps 2.0% 8.5% -2.0% CAAR 5.5% 1.0% -0. In identifying event days we use the estimated jumps and impose the volume restriction.0% 7.0% 2.0% 1 11 21 31 41 51 61 71 81 91 Holding pe riod Sam ple 2 pos itive jum ps 9.5% 1.0% -2.0% 0.5% 3. Sam ple 1 pos itive jum ps 1.0% 1.Figure 10.5% 1 11 21 31 41 51 61 71 81 91 Holding pe riod 0.0% 0.0% -2.0% -3.0% -3.0% 0.0% -1.0% 3.5% 41 51 61 71 81 91 Holding pe riod 36 . We use the market model to estimate the expected normal returns.0% -4.5% -1.0% 4.5% CAAR 0. The left column shows the results for positive jumps and corresponding results for negative jumps are shown in the right column.0% -4.0% 6.0% -5.0% 1.0% 2.0% -1.5% Entire negative jumps 2.0% 1 11 21 31 41 51 61 71 81 91 Holding pe riod CAAR Sam ple 2 pos itive jum ps 10.0% 1.0% 1.0% -0.0% 0.5% 1 11 21 31 CAAR 1.0% CAAR CAAR 0. where S&P100 is used as the market index.0% -0.0% 8. The reported t-values are based on the prediction error variances.5% 0.5% 2.0% 3. Comparing different samples The figure illustrates the estimated CAAR and the related 95% confidence interval for positive and negative jumps for the different time periods.0% -0.0% 1 11 21 31 41 51 61 71 81 91 Holding pe riod Sam ple 3 pos itive jum ps 2.0% 6.5% -1.

Stock # of trading days # of trading days after trading restriction 2474 2473 2463 2400 2472 2472 2471 1712 2472 2473 2471 2470 2472 2466 2471 2471 2451 2471 2401 2472 2391 2470 2470 2159 2419 2446 2468 2284 1350 2415 2469 2470 2469 2471 # of jump days # of jump days after volume restriction 60 47 93 105 33 67 47 117 90 41 57 31 75 115 70 52 92 61 24 38 59 70 43 106 53 80 66 29 10 43 40 52 70 49 AA ABT AEP AES AIG ALL AMGN ATI AVP AXP BA BAC BAX BDK BHI BMY BNI BUD C CAT CCU CI CL CMCSA COF CPB CSC CSCO CVX DD DELL DIS DOW EK 2499 2498 2491 2498 2498 2498 2495 1776 2498 2498 2498 2497 2498 2496 2498 2498 2488 2498 2467 2497 2496 2497 2496 2493 2485 2487 2496 2304 1364 2472 2494 2495 2495 2496 189 116 293 315 87 176 113 342 299 99 132 100 217 384 173 131 318 164 67 135 236 300 138 313 202 243 231 73 32 104 81 132 199 170 37 .Appendix Table A1. Data Restrictions Table XX shows the number of trading days and jump days pre and post imposing the trading and volume restrictions respectively.

Stock # of trading days # of trading days after trading restriction 2471 1275 2468 1585 2402 2469 2425 2471 2469 1958 2470 2470 2469 2469 2470 1931 2469 2470 2321 2418 2449 1585 2470 2468 2468 2467 2278 2468 2467 2416 2468 2321 2467 2467 2470 2467 2468 2468 2428 1392 2399 2466 # of jump days # of jump days after volume restriction 37 29 102 35 83 71 102 25 49 24 41 43 125 92 84 31 39 15 27 54 38 19 36 122 48 51 76 28 34 44 34 31 83 60 50 46 43 24 126 31 37 84 EMC EP ETR EXC F FDX GD GE GM GS HAL HD HET HIG HNZ HON HPQ IBM INTC IP JNJ JPM KO LTD MCD MDT MEDI MER MMM MO MRK MSFT NSC NSM ORCL PEP PFE PG ROK RTN SLB SLE 2496 1308 2496 1601 2463 2496 2495 2495 2495 1977 2495 2495 2495 2495 2495 1950 2495 2495 2345 2471 2495 1600 2496 2494 2493 2493 2494 2493 2498 2474 2493 2358 2493 2493 2494 2493 2493 2493 2473 1429 2457 2493 130 82 409 77 196 227 332 69 147 81 135 124 392 300 251 87 113 46 69 149 119 37 112 369 136 147 206 70 121 131 93 74 231 173 133 133 98 66 363 83 96 229 38 .

Stock # of trading days # of trading days after trading restriction 2468 1771 2469 2443 1823 1501 2467 1663 1414 2179 2467 2457 1812 2469 # of jump days # of jump days after volume restriction 93 29 36 49 40 34 44 28 26 26 71 41 24 84 SO TGT TXN TYC UPS USB UTX VZ WB WFC WMB WMT XOM XRX 2493 1788 2493 2476 1844 1516 2493 1680 1428 2200 2493 2488 1829 2495 242 74 100 169 109 71 144 71 68 90 218 98 41 219 39 .

00% 14.00% 45.00% 70.00% 50.Figure A1.00% 75.00% 35.00% 40.00% 65.00% 12.00% 60.00% 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 Fraction Removed Volume Restriction 80.00% 4.00% 6. Fraction Removed Trading Restriction 16.00% 8. Fractions removed by restrictions The figure shows the fraction of total trading days removed by the restriction on inactive trading (top graph) and on traded volume (bottom graph) for each individual stock.00% 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 40 .00% 2.00% 30.00% 10.00% 0.00% 55.