Costly Interpretation of Asset Prices

Jordi Mondria (), Xavier Vives and Liyan Yang ()
Additional contact information
Jordi Mondria: Department of Economics, University of Toronto, Toronto, Ontario M5S 3G7, Canada
Liyan Yang: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada; Guanghua School of Management, Peking University, 100871 Peking, China

Management Science, 2022, vol. 68, issue 1, 52-74

Abstract: We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational, and their interpretation of prices injects noise into the price, generating a source of endogenous noise trading. Our setup predicts price momentum and yields excessive return volatility and excessive trading volume. In an overall equilibrium, investors optimally choose sophistication levels by balancing the benefit of beating the market against the cost of acquiring sophistication. There can exist strategic complementarity in sophistication acquisition, leading to multiple equilibria.

Keywords: investor sophistication; price momentum; asset prices; complementarity (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2020.3871 (application/pdf)

Related works:
Working Paper: Costly Interpretation of Asset Prices (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:1:p:52-74

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().