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Warp speed price moves: Jumps after earnings announcements

Kim Christensen, Allan Timmermann, Bezirgen Veliyev

TL;DR

The paper develops a noise-robust, tick-by-tick jump test for after-hours stock prices surrounding earnings announcements and applies it to a 12-year dataset of 50 liquid stocks. It demonstrates that earnings announcements trigger jumps in announcing-firm prices with probability well over 90% in after-hours trading, and induce spillovers to non-announcing firms and to the market index, especially when industry proximity and liquidity are high. Using a pre-averaging framework and a plug-in covariance estimator, the authors show that price discovery after earnings announcements is extremely fast and has become faster and more efficient since 2016, reducing the profitability of simple post-announcement trading strategies. These findings have implications for earnings-risk pricing, contingent-claims, and the understanding of liquidity and information diffusion around big public news events.

Abstract

Corporate earnings announcements unpack large bundles of public information that should, in efficient markets, trigger jumps in stock prices. Testing this implication is difficult in practice, as it requires noisy high-frequency data from after-hours markets, where most earnings announcements are released. Using a unique dataset and a new microstructure noise-robust jump test, we show that earnings announcements almost always induce jumps in the stock price of announcing firms. They also significantly raise the probability of price co-jumps in non-announcing firms and the market. We find that returns from a post-announcement trading strategy are consistent with efficient price formation after 2016.

Warp speed price moves: Jumps after earnings announcements

TL;DR

The paper develops a noise-robust, tick-by-tick jump test for after-hours stock prices surrounding earnings announcements and applies it to a 12-year dataset of 50 liquid stocks. It demonstrates that earnings announcements trigger jumps in announcing-firm prices with probability well over 90% in after-hours trading, and induce spillovers to non-announcing firms and to the market index, especially when industry proximity and liquidity are high. Using a pre-averaging framework and a plug-in covariance estimator, the authors show that price discovery after earnings announcements is extremely fast and has become faster and more efficient since 2016, reducing the profitability of simple post-announcement trading strategies. These findings have implications for earnings-risk pricing, contingent-claims, and the understanding of liquidity and information diffusion around big public news events.

Abstract

Corporate earnings announcements unpack large bundles of public information that should, in efficient markets, trigger jumps in stock prices. Testing this implication is difficult in practice, as it requires noisy high-frequency data from after-hours markets, where most earnings announcements are released. Using a unique dataset and a new microstructure noise-robust jump test, we show that earnings announcements almost always induce jumps in the stock price of announcing firms. They also significantly raise the probability of price co-jumps in non-announcing firms and the market. We find that returns from a post-announcement trading strategy are consistent with efficient price formation after 2016.
Paper Structure (44 sections, 12 theorems, 118 equations, 21 figures, 7 tables)

This paper contains 44 sections, 12 theorems, 118 equations, 21 figures, 7 tables.

Table of Contents

  1. Introduction
  2. Market efficiency and price jumps
  3. Earnings announcements
  4. Comparison to existing tests of market efficiency
  5. A noise-robust jump test
  6. The efficient price
  7. The observed price
  8. The pre-averaging approach
  9. Asymptotic theory
  10. A noise- and jump-robust covariance estimator
  11. Monte Carlo study
  12. Data description
  13. Transaction and quotation data
  14. Announcement timing
  15. Earnings surprises
  16. ...and 29 more sections

Key Result

Theorem 1

Assume that $r$ follows the process in equation:X and that Assumptions (V) and (N) in Appendix appendix:proof hold. Then, as $n \rightarrow \infty$, Moreover, provided that $\mathcal{H}_{0}$ is true, as $n \rightarrow \infty$, where "$\overset{d_{s}}{ \longrightarrow}$" denotes convergence in law stably jacod-protter:12a and $\Sigma$ is the $2\times 2$ random asymptotic covariance matrix defined

Figures (21)

  • Figure 1: Examples of price jumps after earnings announcements.
  • Figure 2: Apple's third-quarter 2020 earnings announcement on 07/30/2020.
  • Figure 3: Trading volume and bid-ask spread in the after-hours market.
  • Figure 4: Pre-averaged realized variance and bipower variation.
  • Figure 5: Distribution of the estimated jump proportion.
  • ...and 16 more figures

Theorems & Definitions (12)

  • Theorem 1
  • Theorem 2
  • Theorem 3
  • Lemma 4
  • Lemma 5
  • Lemma 6
  • Lemma 7
  • Lemma 8
  • Lemma 9
  • Lemma 10
  • ...and 2 more