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The effect of favorable and unfavorable information on asset prices

In: Handbook of Experimental Finance

Author

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  • Charles Noussair
  • Steven Tucker
  • Mark Ryan

Abstract

We study experimental markets in which the fundamental value is subject to changes from the arrival of new information. Participants trade in a sequence of three markets, which allows the effect of experience with both positive and negative information to be studied. The results reveal asymmetries in the speed of price discovery; there is more underreaction to positive than to negative information. Both cognitive ability, as captured in the CRT test, and understanding of the fundamental value process, as measured with comprehension quizzes administered after each market, are determinants of individual earnings. Price bubbles in markets with high cash to asset ratios do not dissipate with experience, even when the fundamental value trajectory is constant over time.

Suggested Citation

  • Charles Noussair & Steven Tucker & Mark Ryan, 2022. "The effect of favorable and unfavorable information on asset prices," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 17, pages 194-212, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:20035_17
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    Keywords

    Economics and Finance;

    Statistics

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