Price Adjustment to News with Uncertain Precision

Posted: 9 Feb 2012 Last revised: 15 Feb 2012

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)

Christoph Müller

University of Cologne

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2012

Abstract

We analyze how markets adjust to new information when the reliability of news is uncertain and has to be estimated itself. We propose a Bayesian learning model where market participants receive fundamental information along with noisy estimates of news’ precision. It is shown that the efficiency of a precision estimate drives the slope and the shape of price response functions to news. Increasing estimation errors induce stronger nonlinearities in price responses. Analyzing high-frequency reactions of Treasury bond futures prices to employment releases, we find strong empirical support for the model’s predictions and show that the consideration of precision uncertainty is statistically and economically important.

Keywords: Bayesian learning, Macroeconomic announcements, Information quality, Precision signals

JEL Classification: E44, G14

Suggested Citation

Hautsch, Nikolaus and Hess, Dieter and Müller, Christoph, Price Adjustment to News with Uncertain Precision (January 1, 2012). Journal of International Money and Finance, Vol. 31, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=2000987

Nikolaus Hautsch

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

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

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Dieter Hess (Contact Author)

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

Christoph Müller

University of Cologne ( email )

Meister-Ekkehart-Strasse 11
50923 Cologne, 50937
Germany
+49 (0) 221-470-7704 (Phone)

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