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The risk and return of UK equities following price innovations: a case of market inefficiency?

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  • Robert Hudson
  • Kevin Keasey
  • Kevin Littler

Abstract

This study considers the risk and return of stocks following price innovations of all sizes on UK data. The results indicate that over a long period of time it has been possible to estimate, to some extent, the expected returns and the variance of returns on a given day from the return on the previous day. Although the results indicate it is not possible to make profits (in the presence of transaction costs) from trading on price innovations in general, they do suggest a 'timing' rule which will reduce losses. Essentially, if the market has fallen up to 3% on a given day, the expected return the following day is negative. Therefore, perhaps there is some truth in the old market saying of 'Never try to catch a falling knife' and this has clear implications for the efficiency of the market.

Suggested Citation

  • Robert Hudson & Kevin Keasey & Kevin Littler, 2001. "The risk and return of UK equities following price innovations: a case of market inefficiency?," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 187-196.
    • Handle: RePEc:taf:apfiec:v:11:y:2001:i:2:p:187-196
    DOI: 10.1080/096031001750071587
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    Cited by:

    1. Liam Ison & Robert Hudson, 2017. "Stock predictability and preceding stock price changes – evidence from central and eastern european markets," Economics Bulletin, AccessEcon, vol. 37(2), pages 733-740.
    2. Nam, Kiseok & Washer, Kenneth M. & Chu, Quentin C., 2005. "Asymmetric return dynamics and technical trading strategies," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 391-418, February.
    3. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    4. Hudson, Robert S. & Gregoriou, Andros, 2015. "Calculating and comparing security returns is harder than you think: A comparison between logarithmic and simple returns," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 151-162.
    5. Vinicius Ratton Brandi, 2020. "Short-Term Predictability of Stock Market Indexes following Large Drawdowns and Drawups," Working Papers Series 529, Central Bank of Brazil, Research Department.

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