The Speed of Adjustment of Stock Prices to New Information - An event study on the Swedish stock market

Abstract

The area of efficient markets has been of great interest to economists, scientists and frankly speaking the whole society for centuries. Ever since the days of Eugene Fama the Efficient Market Hypothesis has divided the financial community into sympathizers and opponents. A great variety of studies have either proved or disproved the theory. Our aim with this study was to join the discussion and test whether the semi-strong form of the EMH is applicable on the Swedish stock market. In other words we wanted to know what the speed of adjustment of stock prices to new information was and if there were any unusual patterns of trade surrounding the release of new information. Using the methodology of an event study and intraday data we found both evidence supporting the EMH and one quite interesting anomaly. As it turns out, when companies release a report that is above expectations the stock price increases more rapidly than it decreases subsequent to a bad report.