Abstract
We define an extreme loss event as a daily return at the left tail of negative two standard deviations of all daily returns for a specific stock. Prior studies focus on the relationship between extreme losses and specific anticipated announcements. Our study identifies the extreme loss events after they are randomly realized, and examines the return patterns of the equities in question on stochastic event setups. We investigate the daily returns of 2,651 stocks traded in the U.S. equity markets and identified 217,990 extreme loss events from the 1950s to early 2019. Our findings show that after an extreme loss, an asset realizes, on average, a daily return of 0.8459% on the first day, and 1.8099% cumulatively in the following 5-day window. We attribute the fast recovery to the investors’ overreaction. This suggests an extreme loss reversal trading strategy. Our confirmation suggests that behavioral bias may not be corrected or eliminated through arbitrage.
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Recommended Citation
Guo, Xiaomin; Dong, Huijian; and Patterson, Gary A.
(2024)
"Equity Returns Around Extreme Loss: A Stochastic Event Approach,"
American Business Review: Vol. 27:
No.
1, Article 7.
DOI: 10.37625/abr.27.1.207-220
Available at:
https://digitalcommons.newhaven.edu/americanbusinessreview/vol27/iss1/7
DOI
10.37625/abr.27.1.207-220
