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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