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Bayesian Learning in Financial Markets - Testing for the Relevance of Information Precision in Price Discovery

Centre for Financial Research (CFR), Working Paper 04-10

37 Pages Posted: 14 Jun 2005 Last revised: 16 Sep 2010

Dieter Hess

University of Cologne - Department of Corporate Finance; University of Cologne - Centre for Financial Research (CFR)

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS)

Multiple version iconThere are 2 versions of this paper

Date Written: 2004

Abstract

An important claim of Bayesian learning and a standard assumption in price discovery models is that the strength of the price impact of unanticipated information depends on the precision of the news. In this paper, we test for this assumption by analyzing intra-day price responses of CBOT T-bond futures to U.S. employment announcements. By employing additional detail information besides the widely used headline figures, we extract release-specific precision measures which allow to test for the claim of Bayesian updating. We find that the price impact of more precise information is significantly stronger. The results remain stable even after controlling for an asymmetric price response to 'good' and 'bad' news.

Keywords: Bayesian learning, information precision, macroeconomic announcements, asymmetric price response, financial markets, high-frequency data

JEL Classification: E44, G14

Suggested Citation

Hess, Dieter and Hautsch, Nikolaus, Bayesian Learning in Financial Markets - Testing for the Relevance of Information Precision in Price Discovery (2004). Centre for Financial Research (CFR), Working Paper 04-10. Available at SSRN: https://ssrn.com/abstract=741566 or http://dx.doi.org/10.2139/ssrn.741566

Dieter Hess

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

Nikolaus Hautsch (Contact Author)

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

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

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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