Bayesian Learning in Financial Markets - Testing for the Relevance of Information Precision in Price Discovery

Posted: 1 Nov 2008

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Dieter Hess

University of Cologne - Department of Corporate Finance; University of Cologne - Centre for Financial Research (CFR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 30, 2008

Abstract

Bayesian learning claims that the strength of the price impact of unanticipated information depends on the relative precision of traders' prior and posterior beliefs. In this paper we test for this implication of Bayesian models by analyzing intraday price responses of T-bond futures to U.S. employment announcements. By employing additional detailed information in addition to the widely used headline figures, we extract release-specific precision measures. We find that the price impact of more precise information is significantly stronger, even after controlling for an asymmetric price response to 'good' and 'bad' news. This result strengthens previous findings that differences in earnings response coefficients across companies are related to proxies for the credibility of the reported financial information.

Keywords: information quality, macroeconomic announcements, event studies, asymmetric price response, high-frequency data

JEL Classification: E44, G14

Suggested Citation

Hautsch, Nikolaus and Hess, Dieter, Bayesian Learning in Financial Markets - Testing for the Relevance of Information Precision in Price Discovery (October 30, 2008). Journal of Financial and Quantitative Analysis (JFQA), Vol. 42, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1292524

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Gr√ľneburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Dieter Hess

University of Cologne - Department of Corporate Finance ( email )

Corporate Finance Seminar
Albertus-Magnus-Platz
D-50923 Cologne
Germany
+49 221 470 7876 (Phone)
+49 221 470 7466 (Fax)

HOME PAGE: http://cf.uni-koeln.de/

University of Cologne - Centre for Financial Research (CFR)

Germany

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