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Pundits and Quacks

Author

Listed:
  • Jesper Rudiger

    (Dept. of Economics, University of Copenhagen)

  • Adrien Vigier

    (Dept. of Economics, University of Oslo)

Abstract

Do asset prices aggregate investors� private information about the ability of financial analysts" We show that as financial analysts become reputable, the market can get trapped: Investors optimally choose to ignore their private information, and blindly follow analyst recommendations. As time goes by and recommendations accumulate, arbitrage based on the inferred ability of analysts may become profitable again. The market can thus be trapped at times and yet be able, in the long run, to sort the pundits from the quacks. However, this process is impaired when asset fundamentals are volatile: in this case, the market might be trapped indefinitely.

Suggested Citation

  • Jesper Rudiger & Adrien Vigier, 2015. "Pundits and Quacks," Cowles Foundation Discussion Papers 1997, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1997
    as

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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d19/d1997.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial analysts; Reputation; Market microstructure; Social learning;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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