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Asset Price Dynamics When Traders Care About Reputation

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  • Prat, Andrea
  • Dasgupta, Amil

Abstract

What are the equilibrium features of a dynamic financial market where traders care about their reputation for ability? We modify a standard sequential trading model to study a financial market with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. This finding, which stands in sharp contrast with the results for standard financial markets, is due to the fact that our traders face an endogenous incentive to behave in a conformist manner. We show that there exist equilibria where career-concerned agents trade in a conformist manner when prices have risen or fallen sharply. We also show that each asset carries an endogenous reputational benefit or cost, which may lead to systematic mispricing if asset supply is not infinitely elastic.

Suggested Citation

  • Prat, Andrea & Dasgupta, Amil, 2005. "Asset Price Dynamics When Traders Care About Reputation," CEPR Discussion Papers 5372, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5372
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    References listed on IDEAS

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    1. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    2. Franklin Allen, 2001. "Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, August.
    3. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    4. Franklin Allen & Gary Gorton, 1993. "Churning Bubbles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 813-836.
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    Citations

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    Cited by:

    1. Park, Andreas & Sgroi, Daniel, 2008. "When Herding and Contrarianism Foster Market Efficiency : A Financial Trading Experiment," The Warwick Economics Research Paper Series (TWERPS) 854, University of Warwick, Department of Economics.
    2. Andreas Park & Hamid Sabourian, 2006. "Herd Behavior in Efficient Financial Markets," Working Papers tecipa-249, University of Toronto, Department of Economics.
    3. Luisa Corrado & Marcus Miller & Lei Zhang, 2007. "Bulls, bears and excess volatility: can currency intervention help?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 261-272.
    4. Jean‐Pierre Benoît & Juan Dubra, 2013. "On The Problem Of Prevention," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(3), pages 787-805, August.
    5. Dasgupta, Amil & Prat, Andrea, 2008. "Information aggregation in financial markets with career concerns," Journal of Economic Theory, Elsevier, vol. 143(1), pages 83-113, November.
    6. Portilla, Yolanda, 2009. "Career concerns and investment maturity in mutual funds," UC3M Working papers. Economics we091106, Universidad Carlos III de Madrid. Departamento de Economía.
    7. Amil Dasgupta & Andrea Prat & Michela Verardo, 2011. "Institutional Trade Persistence and Long‐Term Equity Returns," Journal of Finance, American Finance Association, vol. 66(2), pages 635-653, April.

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    More about this item

    Keywords

    Financial equilibrium; Career concerns; Information cascades; Mispricing;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • G0 - Financial Economics - - General

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