IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

A Dynamic Model of the Incorporation of New Information into Prices

  • Charles Geiss

    (University of Missouri-Columbia)

  • Kyung-Seong Jeon

    (University of Missouri-Columbia)

Registered author(s):

    A representative investor in a competitive financial market is uncertain about the true state of the economy. This uncertainty is reflected by a probability distribution of values which the investor forms subjectively based on information that is arriving randomly. The subjective distribution of values is updated by the investor's learning process, which systematically lowers the perceived probability of events economically different from the latest news and increases the believed likelihood of values consistent with this information. By following this learning process, the investor's subjective distribution becomes identical (in an expected sense) to the true distribution of values. The model shows that if there is a regime shift in the true world, the subjective distribution begins an adjustment process which ends again with the true and subjective distributions equal. In increase in real volatility causes no change in the expected subjective mean, but induces an increase in the volatility of the subjective probability function. An increase in the mean of the true world causes the subjective mean to increase, but also causes a temporary increase in the subjective volatility.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://econwpa.repec.org/eps/fin/papers/9805/9805006.html
    Download Restriction: no

    File URL: http://econwpa.repec.org/eps/fin/papers/9805/9805006.ps.gz
    Download Restriction: no

    File URL: http://econwpa.repec.org/eps/fin/papers/9805/9805006.pdf
    Download Restriction: no

    File URL: http://econwpa.repec.org/eps/fin/papers/9805/9805006.doc.gz
    Download Restriction: no

    Paper provided by EconWPA in its series Finance with number 9805006.

    as
    in new window

    Length: 24 pages
    Date of creation: 29 May 1998
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:9805006
    Note: 24 pages, WordPerfect 8
    Contact details of provider: Web page: http://econwpa.repec.org

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:9805006. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.