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Underreaction to fundamental information and asymmetry in mispricing between bullish and bearish markets. An experimental study

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  • Kirchler, Michael

Abstract

In contrast to existing literature we implement experimental asset markets with fluctuating fundamental values following a stochastic process. Therefore we can measure traders' behavior in both bullish and bearish markets. We observe underreaction of price changes to changes in fundamental value which induces overvaluation in bearish and undervaluation in bullish markets. We also find an asymmetry between markets with bullish fundamental values and those with bearish ones as the former markets show a higher degree of informational efficiency. The reason for the observed underreaction lies in the relatively large volatility of the underlying fundamental value process.

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  • Kirchler, Michael, 2009. "Underreaction to fundamental information and asymmetry in mispricing between bullish and bearish markets. An experimental study," Journal of Economic Dynamics and Control, Elsevier, vol. 33(2), pages 491-506, February.
  • Handle: RePEc:eee:dyncon:v:33:y:2009:i:2:p:491-506
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