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Asset Market Reactions to News: An Experimental Study

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Author Info

  • Gunduz Caginalp
  • David Porter

    ()
    (Economic Science Institute, Chapman University)

  • Li Hao

Abstract

An experimental asset market is used to test the effect of news concerning the underlying value of an asset on its trading price. Participants were divided into two groups and received different expected earnings values. Statistical support is found for the hypothesis that investors underreact to news on asset valuation. The results are consistent with the viewpoint that price and valuation history have a significant effect on trader behavior. Two sets of experiments involve a single asset with the same final earnings at the end of the experiment. Expected earnings are updated at the midpoint of the market trading. The two sets of experiments have different expectations of earnings during the first half of the experiment, which became identical after the midpoint. Despite this, the trading prices for the two sets of experiments differ significantly even after their expected earnings coincide. This provides support for underreaction and indicates that decision makers tend to anchor their price expectations to preexisting prices and/or valuations.

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File URL: http://www.chapman.edu/ESI/wp/Porter_AssetMarketReactionsToNews.pdf
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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 11-15.

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Length: 46 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:chu:wpaper:11-15

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  1. Pontiff, Jeffrey, 1997. "Excess Volatility and Closed-End Funds," American Economic Review, American Economic Association, vol. 87(1), pages 155-69, March.
  2. Grether, David M., . "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," Working Papers 245, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
  4. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
  5. T. Randolph Beard & Richard O. Beil, 1994. "Do People Rely on the Self-Interested Maximization of Others? An Experimental Test," Management Science, INFORMS, vol. 40(2), pages 252-262, February.
  6. Douglas Stevens & Arlington Williams, 2004. "Inefficiency in Earnings Forecasts: Experimental Evidence of Reactions to Positive vs. Negative Information," Experimental Economics, Springer, vol. 7(1), pages 75-92, February.
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Cited by:
  1. Shachat, Jason & Srivinasan, Anand, 2011. "Informational price cascades and non-aggregation of asymmetric information in experimental asset markets," MPRA Paper 30308, University Library of Munich, Germany.

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