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Speculative Overpricing in Asset Markets with Information Flows

Palfrey, Thomas R. and Wang, Stephanie W. (2012) Speculative Overpricing in Asset Markets with Information Flows. Social Science Working Paper, 1309. California Institute of Technology , Pasadena, CA. (Unpublished) http://resolver.caltech.edu/CaltechAUTHORS:20170726-172615506

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Abstract

In this paper, we derive and experimentally test a theoretical model of speculation in multi-period asset markets with public information flows. The speculation arises from the traders’ heterogeneous posteriors as they make different inferences from sequences of public information. This leads to overpricing in the sense that price exceeds the most optimistic belief about the real value of the asset. We find evidence of speculative overpricing in both incomplete and complete markets, where the information flow is a gradually revealed sequence of imperfect public signals about the state of the world. We also find evidence of asymmetric price reaction to good news and bad news, another feature of equilibrium price dynamics under our model. Markets with a relaxed short-sale constraint exhibit less overpricing.


Item Type:Report or Paper (Working Paper)
Additional Information:We gratefully acknowledge the financial support of the National Science Foundation (SES-0617820), the Gordon and Betty Moore Foundation, the Social Science Experimental Laboratory at Caltech, and the California Social Science Experimental Laboratory at UCLA. We are grateful for comments from Peter Bossaerts, Ron Harstad, Tony Kwasnica, Stephen Morris, Howard Rosenthal, three referees, a co-editor, and participants at numerous seminars and conferences. Revised version. Original dated to August 2009. Published as Palfrey, T.R., & Wang, S.W. (2012). Speculative overpricing in asset markets with information flows. Econometrica, 80(5), 1937-1976.
Group:Social Science Working Papers
Funders:
Funding AgencyGrant Number
NSFSES-0617820
Gordon and Betty Moore Foundation UNSPECIFIED
Caltech Social Science Experimental LaboratoryUNSPECIFIED
California Social Science Experimental Laboratory (CASSEL)UNSPECIFIED
Subject Keywords:x
Record Number:CaltechAUTHORS:20170726-172615506
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20170726-172615506
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79472
Collection:CaltechAUTHORS
Deposited By: Jacquelyn Bussone
Deposited On:02 Aug 2017 21:34
Last Modified:02 Aug 2017 21:34

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