Facebook’s Nosedive: A Study on Significant Share Price Declines and Subsequent Reversion to the Mean

The recent decline in Facebook’s stock after the company’s third quarter earnings release on July 25, 2018 prompted an analysis of how rare this occurrence is and the prevalence of mean reversion theory. At the time of this writing, Facebook’s common stock is down roughly 20% after the close of markets.

Method
To analyze the historical results, we reviewed 72 companies with a market capitalization above $100 billion as of July 25, 2018 (Refer to Exhibit A for company names and market capitalization). We reviewed daily stock returns from January 1, 2001 through July 25, 2018. We excluded daily returns during the latest recession (December 2007 through April 2009) to adjust for systematic risk. To then isolate significant share price declines, we reviewed days where the share price declined by 15% and 20%.
The reversion to the mean theory was tested by looking at subsequent 10 and 30-day total returns (not annualized) after the significant price declines. We reviewed the results for both 15% and 20% share price declines.

Number of Significant Share Price Declines
Excluding the noted period, the results below illustrate the number of significant one day drawdowns. As expected, the greater market capitalization stocks were relatively immune to the magnitude of the described declines. Per the analysis, Facebook’s decline will be the fifth occurrence January 2001 for a stock with greater than a $500 Billion market cap to dip below 15% and only the third occurrence for one to dip below 20%.

Historical Drawdowns (Single Day Occurrence)

15.0 Percent Decline20.0 Percent Decline
All Companies4217
> $200 Billion113
> $300 Billion73
> $400 Billion42
> $500 Billion42

 

Reversion to the Mean Theory
In terms of reversion to the theory, we analyzed subsequent returns after a large drawdown to see if the price declines were favorable entry points or indications of a falling knife. It is important to note that, during the 15-16 years analyzed, this was a rare occurrence. As a result, the data points are not statistically significant, and any future stock performance would be based on a myriad of factors other than the topic of this article.
Given the results, we observed that the averages and median returns were positive both 10 and 30 days after the drawdown. In terms of market cap size, the lower market cap stocks recovered faster than the larger market cap stocks. The exception was for the 30-day recovery on 20% drawdowns, where we observed larger market cap stocks recovered faster than the lower market cap stocks. While unique, the reasoning may be due to the lack of data points, firm-specific news, and macro events.

See below for additional details:
15.0 Percent Decline Scenarios
30 Day Returns

15 Day Returns

 

20.0 Percent Decline Scenarios

30 Day Returns

30 Day Returns

Exhibit A – Publicly Traded Companies

 

By |2018-07-29T12:47:53+00:00July 29th, 2018|International, Select Articles|Comments Off on Facebook’s Nosedive: A Study on Significant Share Price Declines and Subsequent Reversion to the Mean