Asset Prices and Asymmetric Reasoning

Elena Asparouhova (), Peter Bossaerts, Jon Eguia and William Zame

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: We present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning. We show that under asymmetric reasoning, prices do not reflect all (types of) reasoning. Some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous. If ambiguity averse, these agents become price-insensitive and no longer influence prices directly. We present the results of an experiment and report that consistent with the theory i) mispricing decreases as the fraction of price-sensitive agents increases, and ii) price-insensitive agents trade to more balanced portfolios.

Keywords: Asset pricing theory; disagreement; reasoning models; ambiguity aversion; experimental finance; financial markets. (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 96 pages
Date: 2014-05
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Forthcoming in Journal of Political Economy.

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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:14/640

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