The risk and return of UK equities following price innovations: a case of market inefficiency?

Robert Hudson, Kevin Keasey and Kevin Littler

Applied Financial Economics, 2001, vol. 11, issue 2, 187-196

Abstract: This study considers the risk and return of stocks following price innovations of all sizes on UK data. The results indicate that over a long period of time it has been possible to estimate, to some extent, the expected returns and the variance of returns on a given day from the return on the previous day. Although the results indicate it is not possible to make profits (in the presence of transaction costs) from trading on price innovations in general, they do suggest a 'timing' rule which will reduce losses. Essentially, if the market has fallen up to 3% on a given day, the expected return the following day is negative. Therefore, perhaps there is some truth in the old market saying of 'Never try to catch a falling knife' and this has clear implications for the efficiency of the market.

Date: 2001
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DOI: 10.1080/096031001750071587

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