Uncertain Precision and Price Reactions to Information

THE ACCOUNTING REVIEW, Vol 71, No 2, April 1996

Posted: 28 Jun 1998

See all articles by K.R. Subramanyam

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Abstract

This paper models the effect of information on security prices when there is uncertainty regarding the precision of information. When uncertainty regarding precision is allowed, price response to information is neither linear nor even necessarily monotonic, because the market revises its expectation regarding the precision based on the signal realization. When the underlying information structure is conditionally multivariate normal, the price response (return) is nonlinear with the average response (response per unit of surprise) declining in the absolute magnitude of surprise. This nonlinearity occurs because the market associates lower precision with extreme news. When the precision is distributed in the form of a gamma, the returns function is unimodal in each quadrant ("S-shaped") and negatively sloped at the extremes. The extent of nonlinearity increases in the ex ante uncertainty regarding both the asset value and the precision of information.

JEL Classification: G12

Suggested Citation

Subramanyam, K.R., Uncertain Precision and Price Reactions to Information. THE ACCOUNTING REVIEW, Vol 71, No 2, April 1996. Available at SSRN: https://ssrn.com/abstract=2606

K.R. Subramanyam (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

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