Price Movement After an Information Event Detected by a New Measure of Private Information Ratio

ABSTRACT

The private information ratio (PIR) is measured by a ratio of abnormal returns of a security, which represents security-j-specific information to the unexpected return of equally weighted Korean Composite Stock Price Index (KOSPI) representing broad stock market information. Price movements after a large price movement are examined in two cases: large security-j-specific information for the top (bottom) 10 percent of the PIR distribution and large market-wide information between 40 and 60 percent of the PIR distribution. Two types of cumulative abnormal returns, $CA{R}_{j,S_1}$ and $CR{E}_{j,S_2}$, are computed to see price movements after event days. More supports for return continuations than for return reversals are found, leading to more support for market efficiency.

KEY WORDS:

• overreaction
• price movement
• return continuation
• return reversal
• underreaction

Acknowledgments

The author appreciates the constructive and helpful comments from two anonymous referees and participants in the 2014 VEAM, 2014 Finance and Economics Conference, and 2013 KFMA Fall Conference.

Notes

1. For example, if the weight of Samsung Electronics Co. and Hyundai Motors Co. is too heavy in the volume-weighted stock market index, then these stocks’ price movements seriously affect the movement of KOSPI, which is a volume-weighted stock market index.

2. Assoe and Sy (2003) find these patterns in the Toronto stock exchange; Diacogiannis et al. (2005), in the Athens stock exchange; Fung et al. (2000), in the index futures market; and Wang et al. (2004), in the Chinese stock market.

Additional information

Funding

This work was supported by Hankuk University of Foreign Studies Research Fund.