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Asset Price Dynamics When Traders Care About Reputation

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  • Dasgupta, Amil
  • Prat, Andrea

Abstract

What are the equilibrium features of a dynamic financial market where traders care about their reputation for ability? We modify a standard sequential trading model to study a financial market with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. This finding, which stands in sharp contrast with the results for standard financial markets, is due to the fact that our traders face an endogenous incentive to behave in a conformist manner. We show that there exist equilibria where career-concerned agents trade in a conformist manner when prices have risen or fallen sharply. We also show that each asset carries an endogenous reputational benefit or cost, which may lead to systematic mispricing if asset supply is not infinitely elastic.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5372.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5372

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Keywords: career concerns; financial equilibrium; information cascades; mispricing;

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References

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  1. Franklin Allen, 2001. "Do Financial Institutions Matter?," Center for Financial Institutions Working Papers 01-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  3. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
  4. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
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Cited by:
  1. Luisa Corrado & Marcus Miller & Lei Zhang, 2007. "Bulls, bears and excess volatility: can currency intervention help?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 261-272.
  2. Dasgupta, Amil & Prat, Andrea & Verardo, Michela, 2007. "Institutional Trade Persistence and Long-Term Equity Returns," CEPR Discussion Papers 6374, C.E.P.R. Discussion Papers.
  3. Benoît, Jean-Pierre & Dubra, Juan, 2006. "The problem of prevention," MPRA Paper 2462, University Library of Munich, Germany, revised 30 Mar 2007.
  4. Andreas Park & Hamid Sabourian, 2006. "Herd Behavior in Efficient Financial Markets," Working Papers tecipa-249, University of Toronto, Department of Economics.

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