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Asset Prices and Asymmetric Reasoning

Author

Listed:
  • Elena Asparouhova
  • Peter Bossaerts
  • Jon Eguia
  • William Zame

Abstract

We present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning. We show that under asymmetric reasoning, prices do not reflect all (types of) reasoning. Some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous. If ambiguity averse, these agents become price-insensitive and no longer influence prices directly. We present the results of an experiment and report that consistent with the theory i) mispricing decreases as the fraction of price-sensitive agents increases, and ii) price-insensitive agents trade to more balanced portfolios.

Suggested Citation

  • Elena Asparouhova & Peter Bossaerts & Jon Eguia & William Zame, 2014. "Asset Prices and Asymmetric Reasoning," Bristol Economics Discussion Papers 14/640, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:14/640
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    File URL: http://www.bristol.ac.uk/efm/media/workingpapers/working_papers/pdffiles/dp14640.pdf
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    References listed on IDEAS

    as
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    7. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, March.
    8. Bossaerts, Peter & Zame, William R., 2006. "Asset trading volume in infinite-horizon economies with dynamically complete markets and heterogeneous agents: Comment," Finance Research Letters, Elsevier, vol. 3(2), pages 96-101, June.
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Lawrence C. Y. Choo, 2014. "Trading Participation Rights to the “Red Hat Puzzle”. An Experiment," Discussion Papers 1408, University of Exeter, Department of Economics.
    2. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 11-70, Emerald Group Publishing Limited.

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    More about this item

    Keywords

    Asset pricing theory; disagreement; reasoning models; ambiguity aversion; experimental finance; financial markets.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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