Impact of large stock market index changes on investment portfolios

Abstract

This study examines portfolios returns following markets large price movements and finds that large initial price increases are followed by price continuation and mixed stocks reactions to large initial price decreases. Despite the result suggesting that retail investors are unlikely to profit from such phenomenon after considering the relevant transaction costs, it is still possible for institutional investors to exploit the profit opportunities. In addition, the result shows that both bid-ask spread and market liquidity cannot explain the price reversal observed in this study.