Can the Market Multiply and Divide? Non-Proportional Thinking in Financial Markets

@inproceedings{Shue2019CanTM,
  title={Can the Market Multiply and Divide? Non-Proportional Thinking in Financial Markets},
  author={Kelly Shue and Richard R. Townsend},
  year={2019}
}
Nominal stock prices are arbitrary. Therefore, when evaluating how a piece of news should affect the price of a stock, rational investors should think in percentage rather than dollar terms. However, dollar price changes are ubiquitously reported and discussed. This may both cause and reflect a tendency of investors to think about the impact of news in dollar terms, leading to more extreme return responses to news for lower-priced stocks. We find a number of results consistent with such non… CONTINUE READING

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