Speculative Overpricing in Asset Markets with Information Flows
- Creators
- Palfrey, Thomas R.
- Wang, Stephanie W.
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.
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.Attached Files
Submitted - sswp1309_-_revised.pdf
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Additional details
- Eprint ID
- 79472
- Resolver ID
- CaltechAUTHORS:20170726-172615506
- SES-0617820
- NSF
- Gordon and Betty Moore Foundation
- Caltech Social Science Experimental Laboratory
- California Social Science Experimental Laboratory (CASSEL)
- Created
-
2017-08-02Created from EPrint's datestamp field
- Updated
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2019-11-22Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 1309