Markets: A Rigorous Course
Sign in Sign up

M13 · Problem 16 ★★ Check

Odds-form updating for an RBI decision

Your prior that the RBI cuts the repo rate at its next meeting is 0.35. You then observe (i) a CPI print you judge twice as likely under "cut" as under "no cut", and (ii) MPC commentary you judge 0.7 times as likely under "cut". (a) Compute the posterior after (i) and after both. (b) Show that the order of updating does not matter, and state the assumption needed to multiply likelihood ratios. (c) What would you need to check before trading on the posterior?

Answers

Commas, ₹, % and 1e-3 notation are accepted.

Working

Keep your working next to each problem, in markdown with maths: create a free account or sign in.

Solution

Try the problem first. Write down where you got stuck before opening it.

Create a free account

Reading is open to everyone. An account keeps your progress, answers, notes and code drafts, and gives you the study plan, the journals and the simulator. Running code needs an account approved for it.

Create a free account Sign in