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Measuring mispricing in experimental markets

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Abstract

Mispricing (the di erence between prices and their underlying fundamental values) is an important characteristic of markets. The literature on the topic consists of many di erent measures. This state of a airs is unsatisfactory, since di erent measures may produce di erent results. Stockl et al. (2010) partially address this problem by proposing (among other things) that measures of mispricing be independent of certain nominal variables: the number of dividend payments and the absolute level of fundamental values. Their conditions rule out all previous measures used in the literature and leads them to propose new measures in response. This paper proposes that mispricing measures be independent of an additional variable: the unit of account. This condition rules out the measures proposed by Stockl et al. (2010) and serves as the basis for a new measure of market mispricing, the Geometric Average Deviation (GAD). The unit of account condition is relevant to many market settings, and thus calls into question the ndings of previous research based on other measures that fail to satisfy this condition. An application illustrates the potential impact of this new measure on previous experimental results.

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  • Owen Powell, 2014. "Measuring mispricing in experimental markets," Vienna Economics Papers 1407, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:1407
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    File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie1407.pdf
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    1. Stefan Palan, 2013. "A Review Of Bubbles And Crashes In Experimental Asset Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 570-588, July.
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    Cited by:

    1. Baghestanian, Sascha & Gortner, Paul & Massenot, Baptiste, 2015. "Compensation schemes, liquidity provision, and asset prices: An experimental analysis," SAFE Working Paper Series 108, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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