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"Speculative Investor Behavior and Learning''

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  • Stephen Morris

Abstract

As traders learn about the true distribution of some asset's dividends, a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred. Small differences in prior beliefs lead to large speculative premiums during the learning process. This phenomenon helps explain a paradox concerning the pricing of initial public offerings. The result casts light on the significance of the common prior assumption in economic models. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Paper provided by University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences in its series CARESS Working Papres with number 95-13.

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Handle: RePEc:wop:pennca:95-13

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  1. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  2. Jarrow, Robert A, 1980. " Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices," Journal of Finance, American Finance Association, vol. 35(5), pages 1105-13, December.
  3. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-68, September.
  4. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
  5. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  6. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
  7. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  8. Figlewski, Stephen, 1981. "The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 463-476, November.
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