Market Information Assimilation Related to Extreme Daily Price Jumps

Do stocks that display extreme price movements on a particular day exhibit an irregular pattern of price behavior either before or after this day? An upward trend in prices in the period preceding an extreme price movement might be an indication of substantial insider trading activity. Irregular price behavior in the period following a substantial price increase would suggest that the market does not assimilate information completely and immediately. In this case, a trading rule based on observed extreme price movement may be used to improve investment performance.

The authors examined price relative and residual return behavior in the 11 days before and 10 days after a stock’s appearance on the Wall Street Journal’s daily price leaders’ list. The results (based on 180 stocks and 3,960 closing prices) indicate that information that causes extreme price changes is assimilated by the market instantaneously, in a single day. No significant pattern of price movement is evident before or after this day.

Apparently, the market is fairly efficient and is characterized neither by significant short-term insider trading nor a lagging learning process. No effective systematic investment strategy based on the price leaders’ list can be formulated.