Regulatory uncertainty and share price volatility: the English and Welsh water industry's periodic price review

This paper models the London stock market's response to the 1994 Periodic R eview of prices in the English and Welsh water industry using both GARCH an d stochastic volatility models. The results indicate that a significant red uction in the volatility of share prices for eight of the ten water and sew erage companies followed the announcement of revised industry price-caps. I nvestor expectations adjusted rapidly, reflecting confidence in the credibi lity and political sustainability of the settlement.