Research

H.S. Choi and N. Jayaraman: Is Reversal of Large Stock-Price Declines Caused by Overreaction or Information Asymmetry: Evidence from Stock and Option Markets

July 22, 2006

We reexamine the role of option markets in the reversal process of stock prices following stock price declines of 10 percent or more. We find that the positive rebounds for non-optionable firms are caused by an abnormal increase in bid-ask spread on and before the large price decline date. On the other hand, the bid-ask spreads for optionable firms decrease on and before the large price decline date. We also find an abnormal increase in open interest and volume in the option market on and before the large price decline date.