Information Uncertainty and Stock Returns
48 Pages Posted: 26 Apr 2004
Date Written: April 20, 2004
There is substantial evidence of short-term stock price continuation, which prior literature often attributes to investor behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in short-term CAPM anomalies and cross-sectional variations in stock returns. If short-term price continuation is due to investor behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater information uncertainty produces relatively higher expected returns following good news and relatively lower expected returns following bad news. The evidence presented in this paper supports this hypothesis.
Keywords: Information uncertainty, analyst forecast revision, momentum, expected returns
JEL Classification: G12
Suggested Citation: Suggested Citation