Is the Stock Market Becoming More Bayesian?
11 Pages Posted: 27 Aug 2020
Date Written: July 25, 2020
One simple way for a hypothetical investor to update an estimate of expected returns is to apply the Bayes rule. In its simplest form this involves no information other than an estimate of the prior distribution and historical data on stock returns. However, such a simple method of updating expectations is inconsistent with much of finance theory. This short paper draws out the distinction and asks if the market is becoming more Bayesian and, if so, what are the implications?
Keywords: Bayes rule, valuation, stock market pricing
JEL Classification: G00, G12
Suggested Citation: Suggested Citation