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Asset Market Reactions to News: An Experimental Study

Author

Listed:
  • Gunduz Caginalp
  • David Porter

    (Economic Science Institute, Chapman University)

  • Li Hao

Abstract

An experimental asset market is used to test the effect of news concerning the underlying value of an asset on its trading price. Participants were divided into two groups and received different expected earnings values. Statistical support is found for the hypothesis that investors underreact to news on asset valuation. The results are consistent with the viewpoint that price and valuation history have a significant effect on trader behavior. Two sets of experiments involve a single asset with the same final earnings at the end of the experiment. Expected earnings are updated at the midpoint of the market trading. The two sets of experiments have different expectations of earnings during the first half of the experiment, which became identical after the midpoint. Despite this, the trading prices for the two sets of experiments differ significantly even after their expected earnings coincide. This provides support for underreaction and indicates that decision makers tend to anchor their price expectations to preexisting prices and/or valuations.

Suggested Citation

  • Gunduz Caginalp & David Porter & Li Hao, 2011. "Asset Market Reactions to News: An Experimental Study," Working Papers 11-15, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:11-15
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    References listed on IDEAS

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    Cited by:

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    2. Jason Shachat & Anand Srinivasan, 2022. "Informational Price Cascades and Non-Aggregation of Asymmetric Information in Experimental Asset Markets," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 23(4), pages 388-407, November.

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