How do markets react to (un)expected fundamental value shocks? An experimental analysis

Wael Bousselmi, Patrick Sentis and Marc Willinger
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Wael Bousselmi: CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz]
Patrick Sentis: GESEM - GESEM - Finance - UM1 - Université Montpellier 1

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Abstract: We study experimentally the reaction of asset markets to fundamental value (FV) shocks. The pre-shock and post-shock FV are both constant, but after the shock the FV is either higher or lower than before. We compare treatments with expected shocks (the date and the magnitude are known in advance, but not the direction) to treatments with unexpected shocks (subjects only know that a shock may occur but are unaware of the date and the magnitude). We observe mispricing in markets without shocks and in markets with shocks. Shocks tend to reduce the post-shock price deviation and to increase the difference of opinions (DO), whatever the type of the shock (expected or unexpected) and its direction (upwards or downwards). In contrast to standard predictions, the larger DO after a shock is not accompanied by an increase in transaction volumes, but by sharp depression of share turnover.

Keywords: Experimental asset market; Shocks; Price bubble; Difference of opinions (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-exp
Note: View the original document on HAL open archive server: https://hal.science/hal-02142601v1
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Published in Journal of Behavioral and Experimental Finance, inPress, ⟨10.1016/j.jbef.2019.05.001⟩

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Journal Article: How do markets react to (un)expected fundamental value shocks? An experimental analysis (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02142601

DOI: 10.1016/j.jbef.2019.05.001

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