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Arbitrageurs and overreaction to earnings surprises
2021. Finance Research Letters. Volume 43, November 2021, 101994. https://doi.org/10.1016/j.frl.2021.101994
Francisco Marcet O, Harold Contreras
Abstract:
This paper explores whether arbitrage trades could cause overreaction to earnings announcements. We contrast two hypotheses in a horse race: (1) whether short covering over positive news stocks generates overshooting in stock returns; (2) whether momentum traders trying to arbitrage the post-earnings announcements drift cause overreaction. We find evidence in line with the two hypotheses, but the overshooting is stronger for stocks with high covering. Also, we find that short sellers spot this overreaction and trade these stocks intensively. However, they trade more stocks with high short covering, suggesting that short sellers close their positions quickly to open new ones.
Palabras claves: Arbitrage, Short covering, Momentum traders, Earnings announcements.
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