PRICE REVERSALS, BID-ASK SPREADS, AND MARKET-EFFICIENCY

We examine the behavior of common stock prices after a large change in price occurs during a single trading day and find evidence that the stock market appears to have overreacted, especially in the case of price declines; however, the magnitude of the overreaction is small compared to the bid-ask spreads observed for the individual stocks in the sample. We interpret this finding as being consistent with a market that is efficient after transactions costs are considered. © 1990, School of Business Administration, University of Washington. All rights reserved.