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Financial Experts, Asset Prices and Reputation

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  • Rudiger, Jesper
  • Vigier, Adrien

Abstract

We analyze how financial experts influence asset prices in a sequential trading model. In the model, an expert of unknown ability sends a report about asset values to traders, who then observe a signal about the expert's type. All information about the expert's ability is private to traders and only revealed through trades. When the expert's reputation is sufficiently high, traders ignore their private signal about ability and the market enters a reputational cascade in which no information about the expert reaches the market. Reputational cascades are conducive to asset price bubbles, which eventually result in market crashes when cascades terminate. Rather than being caused by the release of new information, market crashes in our model result from the sudden depreciation of past accumulated information. Finally, we show that reputational cascades are bad for liquidity and induce high price volatility.

Suggested Citation

  • Rudiger, Jesper & Vigier, Adrien, 2013. "Financial Experts, Asset Prices and Reputation," MPRA Paper 51784, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51784
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    File URL: https://mpra.ub.uni-muenchen.de/56829/9/MPRA_paper_56829.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jesper Rudiger & Adrien Vigier, 2015. "Pundits and Quacks," Cowles Foundation Discussion Papers 1997, Cowles Foundation for Research in Economics, Yale University.

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    More about this item

    Keywords

    Informational Cascades; Experts; Reputation; Asset Price Bubbles;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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