Stock Returns Before and After Large Price Moves

In this study, I analyze the correlation between stock returns before and after major price shocks. I hypothesize that if a large price move for a given stock takes place after a short period when the stock's price moves in the same direction, then it may indicate that the fundamentals of the company-specific shock are more completely incorporated in the stock price, significantly increasing the probability of subsequent post-event price reversal. Analyzing a large sample of significant stock price moves, I find that both large price increases and decreases are followed by significant one to three month price reversals (drifts) if they are preceded by the same- (opposite-) sign short-term cumulative abnormal returns. The effect remains significant after accounting for additional relevant company-specific (size, Market Model beta, historical volatility) and event-specific (stock's return and trading volume on the event day) factors