Kc. Brown et al., THE RISK AND REQUIRED RETURN OF COMMON-STOCK FOLLOWING MAJOR PRICE INNOVATIONS, Journal of financial and quantitative analysis, 28(1), 1993, pp. 101-116
This paper presents empirical evidence demonstrating that the risk and
expected returns of common stocks typically change in the aftermath o
f large price movements. When temporary changes in uncertainty follow
major financial events, subsequent stock returns should be positively
correlated with the shift in return volatility. This prediction is str
ongly supported by the data on more than 9,100 daily price change even
ts during 1962-1985. Moreover, the data also suggest that ex ante retu
rns on common stocks may incorporate a premium for increases in parame
ter uncertainty associated with the events.