Paths to Convergence: Stock Price Adjustment After the Trump Election Shock

Abstract

How do market prices adjust towards stability after a shock? Tracking individual stock prices following their dramatic shakeup after Donald Trump’s surprise election provides an answer. Prices moved overwhelmingly in the appropriate direction on the first post-election day, albeit much too little. Relative prices needed several daily iterations to converge. Three days of historically strong cross-sectional momentum were followed by a brief reversal. Prices then settled. Firm characteristics that explained first-day returns, such as corporate taxes and foreign revenues, accounted for most of the observed momentum. These findings support prominent theories of slow but predictable diffusion of information into prices.