Risk Aversion, Uncertain Information, and Market Efficiency


Keith C. Brown

W.V. Harlow

Seha M. Tinic


Journal of Financial Economics 22, 1988, pp. 355-385





This paper develops and tests the uncertain information hypothesis as a means of explaining the response of rational, risk-averse investors to the arrival of unanticipated information.  The theory predicts that following news of a dramatic financial event, both the risk and expected return of the affected companies increase systematically, and that prices react more strongly to bad news than good.  An empirical investigation of over 9000 marketwide and firm-specific events produces results consistent with these predictions.  We conclude that the market reacts to uncertain information in an efficient, if not instantaneous, manner.


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