Investors' Overreaction to an Extreme Event: Evidence from the World Trade Center Terrorist Attack

Posted: 14 Sep 2008 Last revised: 18 Jun 2009

See all articles by Sojung Carol Park

Sojung Carol Park

California State University, Fullerton - Department of Finance; University of Pennsylvania - Applied Economics Department, The Wharton School

Date Written: October 22, 2008

Abstract

This paper investigates whether investors overreacted to the World Trade Center terrorist attack, using insurers' stock returns. Short-term abnormal return reversals are observed after the 9/11 attack. The reversals may reflect the substantially increased uncertainty surrounding insurer stocks after the event, meaning that the price reactions are efficient risk adjustments. However, after controlling for the change in risk, I still find evidence of price reversals, which I attribute to investor overreaction. To bolster this claim, I provide cross-sectional evidence that reversals are stronger for insurers with higher information asymmetry, which have wider ex-ante bid-ask spreads and smaller numbers of analysts following. This result indicates that the reversals are likely due to behavioral biases.

Keywords: September 11, Overreaction Hypothesis, Uncertain Information Hypothesis

Suggested Citation

Park, Sojung Carol, Investors' Overreaction to an Extreme Event: Evidence from the World Trade Center Terrorist Attack (October 22, 2008). Available at SSRN: https://ssrn.com/abstract=1266684

Sojung Carol Park (Contact Author)

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

University of Pennsylvania - Applied Economics Department, The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
682
PlumX Metrics