Investor’s Overreaction to an Extreme Event: Evidence from the World Trade Center Terrorist Attack

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.