LARGE SHARE PRICE MOVEMENTS, REASONS AND

MARKET REACTION

Julijana Angelovska *

Received: 26. 8. 2014 Original scientific paper

Accepted: 5. 4. 2016 UDC 336.763

The objective of this paper is to examine the reasons of firm-level one-day share
price shocks and post -shock reaction. Positive and negative shocks are defined
and detected by using the official news providers, which are required to disclose
price-sensitive information. No information that accompanied one-day share price
shocks was found. It is suggested that irrational behavior by uninformed investors
drives the stock market returns. The reaction to these large price movements has
been investigated as part of the overreaction hypothesis and the results were
supportive of short-term price reversal in the case of price declines.

Keywords: large price movements, information and market efficiency, overreaction,

price reversals, Macedonian Stock Market.

1. INTRODUCTION

In turbulent transition times many stock markets experience sharp falls and
rises in security prices. The reasons of and reaction to such changes should
generate renewed interest in the price behavior of security markets in the
transition countries. According to the well-known efficient market hypothesis,
introduced by Fama (1965), “stock prices at any time fully reflect all available
information” (as cited by McKenzie, 2008, p. 206). It means that stock prices
are unpredictable and that only rational asset pricing models can determined the
expected stock returns. The evidence on the stock market and empirical studies
showed that the stock prices are not unpredictable and that stock prices do not
always reflect all available information. The opposite view of the stock market
philosophy represented by Keynes (1936) is that the investor is not rational and

* Julijana Angelovska, PhD, Faculty of Economics, University of Tourism and Management,

Partizanski odredi 99, Skopje, Macedonia, Phone: + 389 70 380 397, Fax: +389 02 30 93 213,
E-mail: [email protected]

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is guided by short-run speculative motives. Investors are more interested in the

speculative trading and short-run movements then in assessing the present value
of future dividends and holding an investment for a significant period. The
postulates of the efficient market hypothesis are that investors have a long-term
perspective and they make rational calculation of the return on investment based
on changes in the long-run income flows. Investors are interested in short-term
gains and thus have very short-term planning horizons (Crotty, 1990).

Over the years, several inconsistencies with popular asset pricing models,
the so called market anomalies, emerged. Lee et al., (2002) notes that in market
fluctuations the events themselves are not so important, as the human reactions
to those events. Bloomfield et al., (1991) explains that financial markets under-
react to information in some cases or market price does not move upward far
enough in reaction to good news, or does not move downward far enough in
reaction to bad news, while they may overreact in other situations. In order to
understand the inherent dynamics of financial markets Malliaris and Stein
(1999) raised the following question: “If price changes are induced by changes
in information, can information concerning the shocks in fundamental factors
explain the magnitude of the observed price volatility?” Or there are other
factors that can explain the variance of price changes. Cutler et al., (1989) in his
research as well wonder if the information is the cause of market anomalies,
then how is possible to reach excess returns with little or no news. Franke and
Sethi (1998 p.2) argue “that trajectories can easily exhibit complex dynamics,
independently of any arrival of news”.

If stock prices systematically overshot, then their reversals should be

predictable from past return data alone, with no use of any accounting data such
as earnings (Debondt and Thaler, 1985). Debondt and Thaler, (1985) in their
research in experimental psychology, found that “most people overreact to
unexpected and dramatic news”. Motivated by this, Debondt and Thaler (1985)
suggested two hypotheses to be tested: “(1) Extreme movements in stock prices
will be followed by subsequent price movements in the opposite direction, and
(2) The more extreme the initial price movement, the greater will be the
subsequent adjustment with the goal to test if the overreaction hypotheses is
predictive”. These empirical tests are the first attempt to use behavioral
principle to predict new market anomaly.

Further empirical research in different markets can shed more light on the
literature on overreaction. The emerging capital markets in transition countries
have a short history. Macedonian capital market belongs to the newly created
markets in transition countries. The purpose of the article is:

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1. To define and detect large price movements on Macedonian stock

market within the period 2005-2009.
2. To find out the reason of these movements and whether they are
information accompanied?
3. To investigate the behavior of the prices after large price movements
occur. An overreaction hypothesis is employed.

The following hypotheses are being tested:

H o : Expected abnormal return is zero for each stock for each day τ . Neither
price reversal nor price continuation occurs on the day τ .

H 1 : Expected abnormal return is different from zero for each stock for each
day τ . Price reversal or price continuation occurs on the day τ .

The remainder of the article is organized as follows. Section 2 presents the

literature review. Section 3 reviews the methodology to define large price
movements, information and abnormal returns. Section 4 describes the dataset
of variables. In Section 5 the analyses of the results are presented, and Section 6
concludes.

2. LITERATURE REVIEW

Stock market overreaction refers to analyses of the behavior of stock

returns after big price shocks in the literature. There are a number of studies
focusing on share price returns following large price changes. DeBondt and
Thaler (1985) are the forerunners of the overreaction hypotheses. The investors
tend to overreact to extreme price changes due to the human tendency to
overweight current information and underweight prior data (DeBondt and
Thaler, 1985, 1987). Supportive evidence of the investor overreaction
hypothesis is found in the studies of Howe (1986), Brown at al. (1988), Atkins
and Dyl (1990), and Bremer and Sweeney (1991). Reversals are especially
strong for price declines. Stocks associated with high probability of private
information-based trading, uniformly accepted public news surprises, and low
media coverage experience low post-earnings announcement drift, providing an
example of how the presence of information (public or private) can affect post-
event returns (Vega, 2006).

Subsequent price reversal patterns in the short term (ranging from one day
to a full year using daily/weekly data) were mostly tested in the studies. Park

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(1995) also provided qualified support on short term price movements

following large price changes and finds that the apparent price reversals on the
first day following a price shock disappear when mid-prices are used instead of
closing transaction prices which are affected by the bid-ask bounce. Moreover,
while the short-run pattern of abnormal returns following large price changes
does suggest overreaction, the magnitude of the returns is not sufficient to
exploit economically (Lasfer at al., 2003). The pattern of price reversals cannot,
however, be unequivocally attributed to investor overreaction. The sensitivity of
some of the findings suggests some fragility in the definition and measurement
of large price changes and in economic significance of the overreaction. Brown
at al. (1988) find mixed support for post-price shock reversals, reporting
positive abnormal returns after both positive and negative price movements.

Arbel and Jaggi, (1982) find – consistent with the first empirical work
performed on the subject - no evidence of any price reversals (noted exception:
Taiwan). Their results indicate that the market absorbs the information causing
stock prices to change almost immediately. Using monthly index returns from
16 countries Richards (1996 and 1997), found that this apparent anomaly of
winner-loser reversal is not a small market phenomenon and that loser countries
are not more risky than winner countries. January effects are found to be the
reason of the overreaction (Jones, 1989). Chan (2003) constructs an index of
news headlines for a random subset of Center for Research in Security Prices
(CRSP) stocks, and finds momentum after news and reversal after no news,
with the effect mostly driven by loser stocks. The entire daily Dow Jones news
archive from 1979 to 2007 was used to study how presence of public news
affects subsequent returns (Tetlock, 2010). Most studies investigating the
reversal pattern were performed on US data, but Bremer at al. (1997) analyze all
Nikkei 300 stocks. They discover the reversal pattern for the Japanese stock
market, but conclude that investors cannot earn arbitrage profits. Ratner and
Leal (1998) perform their research on emerging markets of Latin America and
Asia (excluding South Africa, Indonesia and China). Lasfer at al. (2003),
studying the price behavior of daily market indices of both developed and
emerging markets worldwide, also fail to gather any evidence in favor of the
price reversal hypothesis.

In the subsequent period the emphasis was put on intra-day data and the
link of extreme events to public (published) information. Hamelink (1999)
looks at stocks listed on the French stock exchange and discovers significant
post-extreme return patterns. Taking the bid-ask spread into account, however,
the overreaction hypothesis cannot be supported. Fehle and Zdorovtsov (2002)
support his findings.

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There is little or no relation between news and aggregate market returns

(Schwert, 1981; Mitchell and Mulherin, 1994). Macroeconomic variables
explain less than half of the variance in aggregate stock prices, and large market
movements often do not coincide with new information of corresponding
importance (Cutler at al., 1989). For individual firms, a model that includes
aggregate economic developments, industry effects, and firm-specific news
explains only a fraction of daily and monthly return variance (Roll, 1988).
Shiller (1981) founds that volatility of stock returns is too high and cannot be
explained just by changes in dividends. Volatility of the returns are high during
market hours even after controlling for information release (French and Roll,
1986).

Savor (2012) analyzes what factors other than new public information may
be a cause of large stock price movements and compares the investors in terms
of how they respond to information and no information based price changes.
The obtained results are consistent with the hypothesis that investors underreact
to new information about the firm and overreact to price movements caused by
other factors, such as shifts in investor sentiment or liquidity shocks (Savor,
2012). The recommendations are important to investors and it has been proven
in a large body of literature. The studies show that recommendations result in
significant contemporaneous stock price reactions, and that investors can profit
by trading on recommendations even after they are released (Altinkilic and
Hansen, 2009; Asquith at al. 2005; Loh and Stulz, 2011).

The significantly negative average cumulative abnormal returns for days 4

through 20 are found in the study of Cox and Peterson (1994) and the
conclusions are that large one-day price declines are more pronounced of
negative performance than of positive performance. The large price changes
accompanied by a public announcement display price continuation is found in
two studies (Pritamani and Singal, 2001; Larson and Madura, 2003). Their
finding supports the notion that uninformed events are associated with
overreaction, whereas informed events are associated with underreaction
(Lasfer at al., 2003).

Caginalp and Balenovich (1999) postulated asset flow theory as an

alternative explanation for the dynamics of stock prices around large price
declines. Other reasons for overreaction like, too many traders are “caught
short” or “underinvested”, and there is a subsequent stampede to buy are found
by Duran and Caginalp (2007). A number of researchers try to explain these

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phenomena by assuming investor behavior is driven by behavioral biases

(Kahneman at al. 1998; Barberis t al. 1998).

3. METHODOLOGY

The definition of ‘large’ price changes is not uniform in the existing

literature. Various researchers use different definitions. For example, Howe
(1986) defines “large” price changes as those weekly price changes exceeding
50 percent. Brown at al. (1988) and Park (1995) define “large” changes with
reference to the market model residuals. Atkins and Dyl (1990) choose the
stocks with the largest one-day price change in the 300-day window. The study
of Bremer and Sweeney (1991) base the results on the stocks that recorded a
daily price decrease of at least 10 percent.

Some studies of significant price events (Pritamani and Singal, 2001) use
returns scaled by volatilities instead of absolute thresholds. The logic behind
this approach is that what constitutes a significant price change is not the same
for high-volatility stocks and for low-volatility stocks (Savor, 2012). However,
return volatility is not exogenous. It reflects the industry a firm operates in and
the degree to which investor sentiment or liquidity shocks affect trading activity
in the stock (Savor, 2012).

The second measure or dynamic trigger values based upon firms expected
return and volatility (Wong 1997; Lasfer et al. 2003) is more appropriate to be
used in this study. Price limitations are defined by the Macedonian Stock
Exchanges’ Board of Directors (static limit ±10%). The static limit was changed
in 2007 to ±5% (MSE, 2007).

We define as large price increase, a positive price shock one where the
return on a particular day exceeds the average market daily return by two
standard deviations ( Rit > µ i + 2σ i ). On the other hand, large price decreases
or negative price shocks are those where the return on a particular day lies two
standard deviations below the average market daily return ( Rit < µ i − 2σ i ).
Sample mean return µi and sample standard deviation σ i of stock i are
estimated over the sample period.

The reasons for large price changes can be driven by a number of factors,
but for the purpose of this study we will focus on new information. The
information is considered to be only the one publicly available to all investors.
We use “price sensitive information” as a proxy for the presence of public

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information in this study. “Price sensitive information” according to The Law

on Securities, shall mean “data of a precise nature relating directly or
indirectly to an issuer of securities and which, if it were made public, would
either be likely to have a significant effect on the prices of such issuer’s
securities or an investor’s decision to purchase, sell or hold such securities”.
Listed companies are legally required to publish this information on the website
SEI - NET, System for Electronic Information (http://seinet.com.mk/).

We apply a standard event study approach to calculate the post-shocks

abnormal returns, ARit, which is similar to that of MacKinlay (1997) as
follows:

ARit = Rit - E(Rit) (1),

where Rit is the daily return on the stock i and

T
Ε( Rit ) = (1 / T )∑ Rij (2),
j =1

E (Rit) is the average return of stock i within the sample period.

The mean abnormal return across event observations on day τ denoted as

AR τ is the sum of individual abnormal returns on day τ divided by the
number of events,

1 N
AR τ =
N
∑ AR τ
i =1
i,
(3),

where N is the number of events.

The cumulative abnormal return for stock i from day τ 1 to day τ 2 denoted
as CARi ( τ 1 ,τ 2 ) is simply summed daily abnormal returns over day τ 1 to
day τ 2 :
τ2
CARi ( τ 1 , τ 2 ) = ∑ AR
τ = τ1
i ,τ
(4).

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The sample average cumulative abnormal return across event observations

from day τ 1 to day τ 2 denoted as CAR( τ 1 , τ 2 ) is the sum of mean abnormal
return over day τ 1 to day τ 2 :
τ2
1 N
(5).
CAR( τ 1 , τ 2 ) = ∑ AR
τ = τ1
t =
N
∑ CAR ( τ
i =1
i 1 ,τ 2 )

These abnormal returns are accumulated over 1, 3, 5, and 10 days

following the price shock by adding them up over these periods.

4. DATA

The modern history of the Macedonian capital market is associated with

structural changes in the 1990s, crossing the country's transition to free market
economy (Angelovska, 2014). Although many regional markets passing through
the same transition period were established earlier, the Macedonian Stock
Exchange was launched in September 1995. The following years of the
Macedonian Stock Market were turbulent and the growth was along with the
economic development and intensification of reforms.

In developed economies stock prices move in highly firm-specific ways

that convey information about changes in firms’ marginal value of an
investment. “In contrast, stock prices in low-income countries tend to move up
and down en masse” (Durned et al., 2004, p.2). This is because non fundamental
trading strategies are more used in the capital markets in developing countries
than in developed countries.

The data comprise the daily returns on all 10 stocks listed on the MBI10, a
weighted index using closing prices and published by the Macedonian Stock
Exchange, as of the beginning of January 2005. The daily returns are computed
based on the closing price of each trading day. The sample period extends from
January 2005 to December 2009. In this period, the Macedonian Stock
Exchange witnessed its first bull and bear market and the stocks have
experienced either extreme capital gains, or extreme capital losses. The trading
volume on the Macedonian Stock Exchange before 2005 was very low and the
investors were barely aware of the stock market.

The investors in Macedonia and other transition countries that moved in a

similar way paid a very expensive investments lecture about the behavior of the
stock market. After this period the trading volume was again low and the

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investors that experienced high losses lost their interest in financial assets. In
Table 1 a description of the dataset is shown. The data are extracted from the
official site of the Macedonian Stock Exchange (www.mse.mk).

Table 1. Summary statistics of daily returns in the sample (2005-2009)

Mean Maximum Minimum Standard

Daily Return Value Value Deviation
Alkaloid 0.08 9.52 -10.53 2.52
Beton 0.19 12.50 -23.63 3.34
Granit 0.18 9.53 -10.53 3.22
Kom. bank 0.10 9.53 -10.53 2.46
Makpetrol 0.09 22.33 -16.67 2.93
Replek 0.16 21.36 -23.38 2.39
Stop.banka Bitola 0.02 9.53 -16.82 2.28
Makstil 0.07 3.27 -8.33 4.89
Toplifikacija 0.09 0.95 -14.17 2.87
Z.K.Bitola 0.20 22.62 -17.37 3.38
MBI 10 0.08 8.09 -10.28 1.87

Source: Author’s calculations.

5. EMPIRICAL RESULTS

We calculate the positive and negative large price changes that exceed
± µ i + 2σ i across the companies. The magnitude of the shocks differ among
the stocks listed on MBI 10, determined by the volatility measured in standard
deviation.

The positive shocks range between 4.58 percent and 9.83 percent and
similarly, the negative shocks range between -9.7 percent and -4.54 percent.
The number of calculated positive and negative shocks and the frequency are
reported in Table 2.

Positive price shocks outnumber negative ones by close to 25%. All

shocks, positive and negative are fully driven by no-information. The first
positive share price shocks are found at the end of February and beginning of
March 2005. The question of whether there were any publicly available
information arises.

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No published “price sensitive information” was found to have

accompanied the calculated price positive and negative shocks. Moreover, we
found published information where the companies announce that they had no
price sensitive information.

Given the significant increase in stock prices, MSE sent a letter to

companies asking for information about the possible existence of price-sensitive
information that could affect the growth of the stock price of the company.

Table 2. Description of positive and negative shocks

% %
No.of positive No.of negative of all of all
shocks (+) shocks (-) shocks shocks
Alkaloid 45 40 3.78% 3.36%
Beton 66 35 5.54% 2.94%
Granit 60 36 5.03% 3.02%
Kom. bank 42 37 3.52% 3.10%
Makpetrol 43 42 3.61% 3.52%
Replek 32 0 2.68% 0.00%
Stop.banka
Bitola 40 32 3.36% 2.68%
Makstil 4 22 0.34% 1.85%
Toplifikacija 49 37 4.11% 3.10%
Z.K.Bitola 52 42 4.36% 3.52%
MBI 10 42 33 3.52% 2.77%

Source: Author’s calculations.

To investigate the possibility of our results being driven by price jumps in

a particular year of our sample period, we split data into each calendar year in
the sample period. The frequencies of the positive and negative shocks are
reported in Table 3.

There are annual differences across the companies throughout the sample
period and the positive shocks are noticed in the period 2005-2007 when the
bubble was boiled and more negative after 2007 when bubble busted. The post-
shock abnormal returns, the mean abnormal return and the cumulative abnormal
return across event observations are calculated.

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Table 3. Annual distribution of positive and negative shocks

2005 2006 2007

Event Event Event Event Event Event
(+) (-) (+) (-) (+) (-)
Alkaloid 33.33 27.50 4.44 7.50 28.89 7.50
Kom. banka 50.00 32.43 16.67 13.51 7.14 5.41
Makpetrol 20.93 14.29 16.28 4.76 20.93 11.90
Granit 38.33 25.00 11.67 5.56 25.00 19.44
Beton 21.21 25.71 15.15 5.71 37.88 14.29
Toplifikacija 14.29 5.41 6.12 2.70 38.78 24.32
Makstil 0.00 13.64 25.00 18.18 25.00 27.27
Replek 31.25 0.00 21.88 0.00 28.13 0.00
Z.K.Pelagonija 23.08 9.52 25.00 16.67 34.62 21.43
Stop.banka
30.00 6.25 25.00 15.63 12.50 12.50
Bitola
MBI10 33.33 12.12 2.38 3.03 14.29 12.12
2008 2009
Event Event Event Event
(+) (-) (+) (-)
Alkaloid 13.33 42.50 20.00 15.00
Kom. banka 7.14 24.32 16.67 24.32
Makpetrol 16.28 40.48 25.58 28.57
Granit 10.00 36.11 15.00 13.89
Beton 9.09 28.57 16.67 25.71
Toplifikacija 14.29 40.54 26.53 27.03
Makstil 0.00 22.73 50.00 18.18
Replek 9.38 0.00 9.38 0.00
Z.K.Pelagonija 7.69 28.57 9.62 23.81
Stop.banka
10.00 46.88 22.50 18.75
Bitola
MBI10 16.67 48.48 33.33 24.24

Source: Author’s calculations.

In Table 4 the frequency of price continuations and price reversals

occurring on days 1, 2, and 3 and days 1-3, 1-5 and 1-10 following the day of
large price increases ( Rit > µ i + 2σ i ) /decreases ( Rit < µ i − 2σ i ) are shown.

In the analysis of the post-shock abnormal return and the cumulative

abnormal return, we find differences across the cases of negative and positive
price shocks. The stock market behavior that follows negative shocks has a
different pattern and values show a higher frequency of price reversals than for
price continuations over the short-term period. The negative shocks are

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followed by positive returns, thus supporting the overreaction hypothesis (Panel

A).
Table 4. Distribution of price continuations and reversals

Panel A (AR<0) (AR>0) (CAR<0) (CAR>0)

Day 1 0.405 0.595 Days 1-3 0.4725 0.5275
Day 2 0.403 0.597 Days 1-5 0.285 0.715
Day 3 0.353 0.647 Days 1-10 0.453 0.547
Panel B (AR>0) (AR<0) (CAR>0) (CAR<0)
Day 1 0.625 0.375 Days 1-3 0.669 0.331
Day 2 0.607 0.393 Days 1-5 0.631 0.369
Day 3 0.419 0.581 Days 1-10 0.455 0.545

Panel A. Price continuations and price reversals after a large one-day decline:
Continuation: AR<0, Reversal: AR>0; Continuation: CAR<0, Reversal: CAR>0.
Panel B. Price continuations and price reversals after a large one-day advance:
Continuation: AR>0, Reversal: AR<0; Continuation: CAR>0, Reversal: CAR<0.
Source: Author’s calculations.

Across the positive events we notice a reversal pattern of continuation or

positive shocks are followed by positive returns (Panel B). The post-shock
abnormal return and the cumulative abnormal return (following the shocks)
seem to provide some support for the price reversal hypothesis in the cases of
day 3 and days1-10. The settlement of the securities transactions is carried out
on the third business day (T + 3) after the day the transaction is concluded
(MSE). This can offer an explanation of why the reversal occurs in the case of
large positive price movements during the third day. Some investors are just
satisfied with the 3 day earning, but there is still shift in the demand by the
investors that think prices will rise and again continuum happens.

According to conventional finance theory all investors are rational

individuals who intent on maximizing their utility. If the investors have rational
expectations they would only trade when new information is released that alters
their perception of the value of the share under consideration. But very often
share prices alter when there is little or no new information released that could
be used to justify the changes. The only rational explanation for these price
changes is that they are the product of investment decisions made by irrational
or uninformed investors who base their investment decisions on observations of
others’ actions and the behavior of the share price itself.

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For uninformed or irrational investors, the price of the share and the rate
with which it alters are particularly strong signals to trade. Uninformed traders
are strongly influenced by the recent trades, and are more likely to buy (sell)
when previous trades have been bought (sold) (Easley, Kiefer and O’Hara
(1997a, b).

6. CONCLUSIONS

The results of this study are based on a sample of 10 firms listed on the
MBI10 index over the five-year period from January 2005 to December 2009.
We begin our inquiry into return behavior after large price movements by
selecting large price changes, as a mean plus/minus two standard deviations.
Positive and negative price shocks are detected within sample period and no
good or bad news supported these events. The investors on the Macedonian
capital market seem that are supporters of non-fundamental trading strategies.
To support the non-rational behavior of the stock market, an overreaction
hypothesis is tested.

The results indicate that the Macedonian stock market appears to have
overreacted; stock prices tend to be reversed after large price changes especially
in the case of price decreases. The results are consistent with previous studies
that documented evidence supportive to investors’ overreaction hypothesis and
especially strong price reversals in the post-negative shocks.

Evidence of price continuation becomes more important for positive price

shocks, because investors are trend chasers and think that prices will continue to
rise. The sharp increase or decrease that does not have to be information-
supported serves as a signal. The puzzling price pattern following major price
shocks on the Macedonian stock market may be explained by behavioral
principles, the issue we address in further research.

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VELIKE PROMJENE U CIJENI DIONICA, RAZLOZI I REAKCIJE TRŽIŠTA

Sažetak

Cilj ovog rada je ispitati razloge jednodnevnih naglih promjena cijena dionica poduzeća
i reakcija na tržišni šok. U radu se definiraju i identificiraju pozitivni i negativni šokovi,
pri čemu se koriste službeni izvori informacija, koji moraju objavljivati informacije o
kojima ovisi cijena. Nisu otkrivene informacije povezane s jednodnevnim šokovima,
odnosno naglim promjenama u cijenama dionica. Smatra se da iracionalno ponašanje
neinformiranih investitora utječe na povrate na financijskom tržištu. Reakcije na velike
promjene u cijenama dionica istraživane su kao dio hipoteze o pretjeranoj reakciji i
rezultati su hipotezu potvrdili u slučaju kratkotrajnog preokreta u cijeni, odnosno u
slučaju kada cijene padaju.

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