Bayesian Pricing of News
56 Pages Posted: 20 Aug 2018 Last revised: 30 Dec 2020
Date Written: December 29, 2020
This paper characterizes the equilibrium stock price reaction to arbitrarily distributed signals when the prior distribution of the payoff is normal and the utility is exponential. This stock price reaction is shown to be proportional to the Fisher score of the news calculated under a risk-neutral probability measure. As an application of our analysis, we (i) characterize the stock price reaction to news whose arrival is content-dependent, (ii) develop a model of "agenda-setting" disclosures, and (iii) construct an equilibrium in a voluntary disclosure model with multidimensional information and risk averse investors.
Keywords: Voluntary Disclosure, Cost of Capital, Pricing of News, Fisher Score
JEL Classification: D21, D82, D83, M41
Suggested Citation: Suggested Citation