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News And Expectations In Financial Markets: An Experimental Study

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  • Gordon Menzies

    ()

  • Daniel Zizzo

    ()

Abstract

We consider an experimental setting where traders in stock markets or exchange rate markets receive one stylized piece of information at a time about the value of an asset. We find that having limited knowledge about the prior distribution of true asset values does not hamper the decision making by traders and markets. There is empirical support for the common modeling assumption of simplifying agent heterogeneity into two types, a rational one and a less rational one. A correspondence exists between the average degree of belief conservatism found with individual buying and selling prices and that observed with market prices.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-34.

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Length: 39 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:een:camaaa:2008-34

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  1. Gordon Menzies & Daniel John Zizzo, 2004. "Inferential Expectations," Economics Series Working Papers, University of Oxford, Department of Economics 187, University of Oxford, Department of Economics.
  2. Gordon Menzies & Daniel Zizzo, 2006. "Exchange Rate Markets And Conservative Inferential Expectations," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2007-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Evans, Dorla A, 1997. "The Role of Markets in Reducing Expected Utility Violations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(3), pages 622-36, June.
  4. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
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