News-Driven Return Reversals: Liquidity Provision Ahead of Earnings Announcements

By Eric C. So, Sean Wang. 2014

120 citations recorded by the source corpus.

This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings highlight significant time-series variation in the magnitude of short-term return reversals and suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in the compensation demanded for providing liquidity and that these increases significantly affect the dynamics and information content of market prices.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/b5afa9db68d85c5ed820ceb4963e27e1233e0d52

Citations in the corpus

• High-Frequency Trading and Extreme Price Movements (2018, unknown): “Hendershott and Seasholes (2007), Nagel (2012) and So and Wang (2014) find that providing liquidity against price movements that eventually reverse is a profitable strategy.”