Is the Stock Market Becoming More Bayesian?

11 Pages Posted: 27 Aug 2020

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Date Written: July 25, 2020

Abstract

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

Cornell, Bradford, Is the Stock Market Becoming More Bayesian? (July 25, 2020). Available at SSRN: https://ssrn.com/abstract=3660649 or http://dx.doi.org/10.2139/ssrn.3660649

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

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