The effect of equity market uncertainty on informational efficiency: Cross-sectional evidence

Abstract

We study the effect of equity market uncertainty (EMUNC) on the informational efficiency of U.S. equity prices. Based on the findings, EMUNC negatively affects informational efficiency, i.e., as EMUNC increases, equity prices become less efficient. More importantly, this negative impact is heterogeneous in the cross-section of stocks, with a stronger negative impact on hard-to-arbitrage stocks. We also find that stocks with a higher historical uncertainty exposure are more sensitive to EMUNC.