Short-term reaction of stock markets in stressful circumstances

In this paper we document the short-term stock price behaviour following a period of stock market stress. We focus on price behaviour using daily market indexes from 39 stock exchanges over the period 1989-1998. Our results are not consistent with the overreaction hypothesis. We find positive (negative) abnormal price performance in the short-term window (up to 10 days) following positive (negative) price shocks. Our analysis also highlights differences between developed and emerging markets. We show that the post-shock abnormal performances are significantly larger for emerging markets but that this momentum behaviour is markedly less in the late 1990s. We find the size of the after-shock tremors to be related to market liquidity, with larger post-shock price changes in less-liquid markets.