How does the stock market absorb shocks?

Murray Z. Frank, Ali Sanati

Research output: Contribution to journalArticlepeer-review

42 Scopus citations


Using a comprehensive set of news stories, we find a stark difference in market responses to positive and negative price shocks accompanied by new information. When there is a news story about a firm, positive price shocks are followed by reversal, while negative ones result in drift. This is interpreted as the stock market overreaction to good news and underreaction to bad news. These seemingly contradictory results can be explained in a single framework, considering the interaction of retail investors with attention bias, and arbitrageurs with short-run capital constraints. Consistent with this hypothesis, we find that both patterns are stronger when the attention bias is stronger, and when the arbitrage capital is scarce.

Original languageEnglish (US)
Pages (from-to)136-153
Number of pages18
JournalJournal of Financial Economics
Issue number1
StatePublished - Jul 2018

Bibliographical note

Publisher Copyright:
© 2018


  • Limited attention
  • Limits to arbitrage
  • News
  • Overreaction
  • Stock return predictability
  • Text analysis
  • Underreaction


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