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Price Adjustment to News with Uncertain Precision

49 Pages Posted: 4 Mar 2007 Last revised: 29 Mar 2012

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)

Christoph Müller

University of Cologne

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Date Written: November 1, 2010

Abstract

We analyze how markets adjust to new information when the reliability of news is uncertain and has to be estimated itself. We propose a Bayesian learning model where market participants receive fundamental information along with noisy estimates of news' precision. It is shown that the efficiency of a precision estimate drives the shape and the location of price response functions to news. Increasing estimation errors induce stronger nonlinearities in price responses. Analyzing high-frequency reactions of T-bond futures prices to employment releases, we find strong empirical support for the model's predictions and show that the consideration of precision uncertainty is statistically and economically important.

Keywords: Bayesian learning, information quality, precision signals, macroeconomic announcements

JEL Classification: E44, G14

Suggested Citation

Hess, Dieter and Hautsch, Nikolaus and Müller, Christoph, Price Adjustment to News with Uncertain Precision (November 1, 2010). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=966271 or http://dx.doi.org/10.2139/ssrn.966271

Dieter Hess (Contact Author)

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

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

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

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Christoph Müller

University of Cologne ( email )

Meister-Ekkehart-Strasse 11
50923 Cologne, 50937
Germany
+49 (0) 221-470-7704 (Phone)

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