You can manage bookmarks using lists, please log in to your user account for this.
Media type:
E-Article
Title:
Price Reaction to Information with Heterogeneous Beliefs and Wealth Effects: Underreaction, Momentum, and Reversal
Contributor:
Ottaviani, Marco;
Sørensen, Peter Norman
Published:
American Economic Association, 2015
Published in:
The American Economic Review, 105 (2015) 1, Seite 1-34
Language:
English
ISSN:
0002-8282
Origination:
Footnote:
Description:
This paper analyzes how asset prices in a binary market react to information when traders have heterogeneous prior beliefs. We show that the competitive equilibrium price underreacts to information when there is a bound to the amount of money traders are allowed to invest. Underreaction is more pronounced when prior beliefs are more heterogeneous. Even in the absence of exogenous bounds on the amount that traders can invest, prices underreact to information provided that traders become less risk averse as their wealth increases. In a dynamic setting, underreaction results in initial momentum and then reversal in the long run.