Pundits and Quacks

Jesper Rudiger and Adrien Vigier
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Jesper Rudiger: Dept. of Economics, University of Copenhagen

No 1997, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Keywords: Financial analysts; Reputation; Market microstructure; Social learning (search for similar items in EconPapers)
JEL-codes: D82 D83 D84 G14 G20 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2015-03
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