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Speculative investor behavior and learning

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  • Stephen D. 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 re-selling 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.

Suggested Citation

  • Stephen D. Morris, 1996. "Speculative investor behavior and learning," Working Papers 96-5, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:96-5
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    References listed on IDEAS

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    Keywords

    Investments; Stock - Prices;

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