How do markets react to (un)expected fundamental value shocks? An experimental analysis

We study experimentally the reaction of asset markets to fundamental value (FV) shocks. The pre-shock and post-shock FV are both constant, but after the shock the FV is either higher or lower than before. We compare treatments with expected shocks (the date and the magnitude are known in advance, but not the direction) to treatments with unexpected shocks (subjects only know that a shock may occur but are unaware of the date and the magnitude). We observe mispricing in markets without shocks and in markets with shocks. Shocks tend to reduce the post-shock price deviation and to increase the difference of opinions (DO), whatever the type of the shock (expected or unexpected) and its direction (upwards or downwards). In contrast to standard predictions, the larger DO after a shock is not accompanied by an increase in transaction volumes, but by sharp depression of share turnover.