How fast do security prices react to new info

Question 1

Patell and Wolfson 1984

Answer 1

• Market is efficient
• the initial price reaction is evident in the first pair of price changes following the release (i.e. within a few minutes).
• The returns earned by simple trading rules dissipate within five to ten minutes, although significant returns are detected in the overnight period and at the opening of trading on the next day.
• Disturbances in the variance and serial correlation persist for several hours and extend into the following trading day.
• As a class, dividend announcements induce much less activity than do earnings.

Question 2

Ederington and Lee 1993

Answer 2

• examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets.
• We find these announcements are responsible for most of the observed time-of-day and day-of-the-week volatility patterns in these markets.
• While the bulk of the price adjustment to a major announcement occurs within the first minute, volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours.
• Nonetheless, these subsequent price adjustments are basically independent of the first minute’s return.

Question 3

Kim, Lin and Slovin 1997

Answer 3

• We examine stock price behavior in response to initial coverage, buy recommendations that are pre-released to important clients before the stock market opens, and find a strong positive valuation effect at the open.
• On average, it takes five minutes of trading for NYSE/AMEX stocks and 15 minutes for NASDAQ stocks to reflect the private information contained in these analyst recommendations, so when informational asymmetry is high, the centralized call market is more efficient than a competitive, but fragmented dealer market.
• Public news release leaves share prices unaltered.
• Overall, competition among informed traders causes private information to be rapidly incorporated into stock prices.

Question 4

Brusse and Green 2002

Answer 4

• The Morning Call and Midday Call segments on CNBC TV provide a unique opportunity to study the efficient market hypothesis.
• We find that prices respond to reports within seconds of initial mention, with positive reports fully incorporated within one minute.
• Trading intensity doubles in the first minute, with a significant increase in buyer- (seller-) initiated trades after positive (negative) reports.
• Traders who execute within 15 seconds of the initial mention make small but significant profits by trading on positive reports during the Midday Call.

Question 5

Chordia, Roll and Subrahmanyam 2005

Answer 5

• Daily returns for stocks listed on the New York Exchange (NYSE) are not serially correlated while order imbalances on the same stocks are highly persistent.
• These empirical facts can be reconciled if sophisticated investors react to order imbalances within the trading day by undertaking enough countervailing trades to remove serial dependence over a daily horizon.
• How long does this actually take?
• The pattern of intra-day serial dependence reveals that it takes more than five minutes but less than sixty minutes.

Question 6

Chordia, Roll and Subrahmanyam 2008

Answer 6

• Short-horizon return predictability from order flows is an inverse indicator of market efficiency.
• We find that such predictability is diminished when bid-ask spreads are narrower, and has declined over time with the minimum tick size.
• Variance ratio tests suggest that prices were closer to random walk benchmarks in the more liquid decimal regime than in other ones.
• These findings indicate that liquidity stimulates arbitrage activity, which, in turn, enhances market efficiency.
• Further, as the tick size decreased, open-close/close-open return variance ratios increased, while return autocorrelations decreased.
• This suggests an increased incorporation of private information into prices during more liquid regimes.