<P>NOISE, BAYES’ RULE AND THE
RECENCY HEURISTIC</P>
<P>Abstract</P>
<P>
This paper studies empirical market anomalies and the underlying model of
market efficiency. Within a Bayesian framework, I find a closed form solution for
the decision process under a random walk with noise model of market efficiency.
The main conclusions are as follows:</P>
<P>
1. A “bad market efficiency model problem” exists in addition to Fama’s (1998)
“bad [asset pricing] model problem.” Noise is important and should be modeled
explicitly.
2. Bayesian updating is a valid and insightful methodology. In order to support
the psychologist’s claim that Bayes’ rule is invalidated by observing recency
in decision making would require implausible levels of noise in market prices.</P>
<P>
While providing a unified explanation of past market anomalies, the model endogenously
derives the intuitive insight that markets are noisy in the short term
and informative in the long term.
JEL subject classifications: G12, G13, C14, G22
</P>
<P>Key words: Bayesian updating, information extraction, behavioral
finance, market efficiency, recency bias, noise.



</P>

[此贴子已经被作者于2004-10-27 23:18:48编辑过]