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Measuring mispricing in experimental markets

Owen Powell ()

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: Mispricing (the di erence between prices and their underlying fundamental values) is an important characteristic of markets. The literature on the topic consists of many di erent measures. This state of a airs is unsatisfactory, since di erent measures may produce di erent results. Stockl et al. (2010) partially address this problem by proposing (among other things) that measures of mispricing be independent of certain nominal variables: the number of dividend payments and the absolute level of fundamental values. Their conditions rule out all previous measures used in the literature and leads them to propose new measures in response. This paper proposes that mispricing measures be independent of an additional variable: the unit of account. This condition rules out the measures proposed by Stockl et al. (2010) and serves as the basis for a new measure of market mispricing, the Geometric Average Deviation (GAD). The unit of account condition is relevant to many market settings, and thus calls into question the ndings of previous research based on other measures that fail to satisfy this condition. An application illustrates the potential impact of this new measure on previous experimental results.

JEL-codes: C43 C90 D84 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
Date: 2014-10
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