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The Relationship Between Uncertainty and the Market Reaction to Information: How is it Influenced by Market and Stock-Specific Characteristics?

Ron Bird (), Krishna Reddy and Danny Yeung ()
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Krishna Reddy: Waikato Management School, University of Waikato

No 14, Working Paper Series from The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney

Abstract: Numerous empirical studies dating back to Ball and Brown (1968) have investigated how markets react to the receipt of new information. However, it is only recently that authors have focussed on differentiating between, and learning from, how investors react to good and bad news. In this paper we find that investors swing between being optimistic and being pessimistic in their interpretation of the new information driven by not only the prevailing market uncertainty and sentiment but also by a significant number of firm-specific characteristics. Pessimism prevails when uncertainty is high, sentiment is weak and the information is being disseminated by companies that are lowly-valued, have high risk, are thinly traded and/or are small cap stocks. However, investors swing to being optimistic when one reverses some or all of these factors. The conclusion that we draw is that risk, uncertainty and the attitude of investors combine to determine how the markets react to new information and this flows through to asset valuations.

JEL-codes: G11 G12 G14 D81 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2011-09-01
New Economics Papers: this item is included in nep-cfn and nep-fmk
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http://www.uts.edu.au/sites/default/files/wp14.pdf (application/pdf)

Related works:
Journal Article: The relationship between uncertainty and the market reaction to information: Is it influenced by stock-specific characteristics? (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:uts:pwcwps:14

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