Hostname: page-component-76fb5796d-r6qrq Total loading time: 0 Render date: 2024-04-29T10:33:17.541Z Has data issue: false hasContentIssue false
  • English
  • Français

The Risk and Required Return of Common Stock following Major Price Innovations

Published online by Cambridge University Press:  06 April 2009

Keith C. Brown ,
W. V. Harlow  and
Seha M. Tinic
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper presents empirical evidence demonstrating that the risk and expected returns of common stocks typically change in the aftermath of large price movements. When temporary changes in uncertainty follow major financial events, subsequent stock returns should be positively correlated with the shift in return volatility. This prediction is strongly supported by the data on more than 9,100 daily price change events during 1962–1985. Moreover, the data also suggest that ex ante returns on common stocks may incorporate a premium for increases in parameter uncertainty associated with the events.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 28 , Issue 1 , March 1993 , pp. 101 - 116
Copyright
Copyright © School of Business Administration, University of Washington 1993

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barry, C., and Brown, S.. “Differential Information and Security Market Equilibrium.” Journal of Financial and Quantitative Analysis, 20 (12 1985), 407–422.CrossRefGoogle Scholar
Brown, K.; Harlow, W.; and Tinic, S.. “Risk Aversion, Uncertain Information, and Market Efficiency.” Journal of Financial Economics, 22 (12 1988), 355–385.CrossRefGoogle Scholar
Coles, J., and Loewenstein, U.. “Equilibrium Pricing and Portfolio Composition in the Presence of Uncertain Parameters.” Journal of Financial Economics, 22 (12 1988), 279–303.CrossRefGoogle Scholar
Fama, E., and French, K.. “Permanent and Temporary Components of Stock Prices.” Journal of Political Economy, 96 (04 1988), 246–273.Google Scholar
French, K.; Schwert, W.; and Stambaugh, R.. “Expected Stock Returns and Volatility.” Journal of Financial Economics, 19 (09 1987), 3–29.CrossRefGoogle Scholar
Haugen, R.; Talmor, E.; and Torous, W.. “The Effect of Volatility Changes on the Level of Stock Prices and Subsequent Expected Returns.” Journal of Finance, 46 (07 1991), 985–1007.CrossRefGoogle Scholar
Hsu, D. “Tests for Variance Shift at an Unknown Time Point.” Applied Statistics, 26 (12 1977), 279–284.CrossRefGoogle Scholar
Levi, M. “Measurement Errors and Bounded OLS Estimates.” Journal of Econometrics, 6 (09 1977), 165–171.CrossRefGoogle Scholar
Lo, A., and MacKinlay, C.. “Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test.” Review of Financial Studies, 1 (Spring 1988), 41–66.Google Scholar
Poterba, J., and Summers, L.. “Mean Reversion in Stock Prices: Evidence and Implications.” Journal of Financial Economics, 22 (10 1988), 27–59.Google Scholar
Ruback, R. “The Effects of Discriminatory Price Control Decisions on Equity Values.” Journal of Financial Economics, 10 (03 1982), 83–105.CrossRefGoogle Scholar