SPECULATIVE OVERPRICING IN ASSET MARKETS WITH INFORMATION FLOWS

In this paper, we derive and experimentally test a theoretical model of speculation in multiperiod 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...

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Bibliographic Details
Published in:Econometrica 2012-09, Vol.80 (5), p.1937-1976
Main Authors: Palfrey, Thomas R., Wang, Stephanie W.
Format: Article
Language:English
Subjects:
Applications
Asset markets
Asset pricing
Bank assets
Case studies
Economic bubbles
Economic information
Economic models
Equilibrium
Equilibrium prices
Evidence
Exact sciences and technology
experimental finances
Experimental methods
heterogeneous beliefs
Insurance, economics, finance
Market prices
Mathematics
Modeling
Price premiums
Pricing
Probability and statistics
Rational expectations theory
Sciences and techniques of general use
Securities markets
Securities prices
Short sales
Speculation
Statistics
Studies
Trajectories
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Summary:In this paper, we derive and experimentally test a theoretical model of speculation in multiperiod 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.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA8781