Price Adjustment to News with Uncertain Precision
49 Pages Posted: 4 Mar 2007 Last revised: 29 Mar 2012
There are 2 versions of this paper
Price Adjustment to News with Uncertain Precision
Price Adjustment to News with Uncertain Precision
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market
-
Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Markets
-
What Explains the Stock Market's Reaction to Federal Reserve Policy?
-
What Explains the Stock Market's Reaction to Federal Reserve Policy?
-
The Effect of Changes in the Federal Funds Rate Target on Market Interest Rates in the 1970s
By Timothy Cook and Thomas K. Hahn
-
The Impact of Monetary Policy on Asset Prices
By Brian P. Sack and Roberto Rigobon
-
The Impact of Monetary Policy on Asset Prices
By Brian P. Sack and Roberto Rigobon
-
Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets
By Torben G. Andersen, Clara Vega, ...
-
Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets
By Torben G. Andersen, Clara Vega, ...
-
Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets
By Torben G. Andersen, Clara Vega, ...