THE ADJUSTMENT OF STOCK PRICES TO COMPLETELY UNANTICIPATED EVENTS

W. Brian Barrett, Andrea Heuson, Robert W. Kolb, Gabriele H. Schropp

Research output: Contribution to journalArticle

21 Citations (Scopus)

Abstract

This paper utilizes standard cumulative residual analysis to study the response of stock prices to completely unanticipated events—fatal commercial airline crashes. Results indicate that the immediate negative reaction to fatal airline crashes is significant for only one full trading day after the event occurs. Hence, the market appears to assimilate the new information rapidly, even if the crash occurs in a remote geographic location. The paper also considers market response after the initial reaction period by assuming that the actual cumulative average residuals are drawn from the same distribution as the pre‐crash base period and by calculating the probabilities that observed changes would occur. Results provide no evidence that underreaction or overreaction appeared in the initial response period. The hypothesis of complete, immediate adjustment is also supported by a repetition of the analysis on the subsample of airplane crashes where the greatest potential loss occurs.

Original languageEnglish (US)
Pages (from-to)345-354
Number of pages10
JournalFinancial Review
Volume22
Issue number4
DOIs
StatePublished - Jan 1 1987

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Stock prices
Crash
Airlines
Underreaction
Overreaction
Market response
Geographic location

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

THE ADJUSTMENT OF STOCK PRICES TO COMPLETELY UNANTICIPATED EVENTS. / Barrett, W. Brian; Heuson, Andrea; Kolb, Robert W.; Schropp, Gabriele H.

In: Financial Review, Vol. 22, No. 4, 01.01.1987, p. 345-354.

Research output: Contribution to journalArticle

Barrett, W. Brian ; Heuson, Andrea ; Kolb, Robert W. ; Schropp, Gabriele H. / THE ADJUSTMENT OF STOCK PRICES TO COMPLETELY UNANTICIPATED EVENTS. In: Financial Review. 1987 ; Vol. 22, No. 4. pp. 345-354.
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