Bayesian Pricing of News
42 Pages Posted: 20 Aug 2018
Date Written: August 6, 2018
This paper characterizes the equilibrium stock price reaction to arbitrarily distributed signals. This stock price reaction is shown to be proportional to the Fisher score of the news calculated under the risk-neutral probability measure. The expression for the Fisher score takes a particularly compact form for news whose distribution is obtained by conditioning a latent multivariate normal signal, a situation which often arises in partial-pooling equilibria. As an application of our analysis, we (i) characterize the stock price reaction to news whose arrival is content-dependent, and (ii) construct an equilibrium in a voluntary disclosure model with multidimensional information and risk averse investors.
Keywords: Persuasion Games, Voluntary Disclosure, Cost of Capital, News Pricing
JEL Classification: D21, D82, D83, M41
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