Price Discovery

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Price Discovery

The process by which buyers and sellers interact to determine the fair market price of an asset. See also: Law of supply and demand.
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There is, however, one important difference in the price discovery processes. If the announcement is made during trading hours, the first post-announcement transaction accounts for only 14% of the total CAR, whereas if the announcement is made during nontrading hours, the first post-announcement transaction (the overnight trade) accounts for 69% of the total CAR.(20) Figure I contains graphs of CARs calculated from the abnormal returns presented in Table 2 and illustrates this difference in the price discovery processes.
As the figures show, the price discovery processes are similar to those observed for the sample as a whole, although as expected, the magnitude of the price response to the more surprising announcements is larger.
In this section, we examine price continuity following the announcements and trading volume in order to further our understanding of the price discovery processes. Our price continuity analysis is based on the well-documented "reversal tendency" (i.e., negative serial correlation) in intraday transaction prices.