Financial Experts, Asset Prices and Reputation

Jesper Rudiger and Adrien Vigier

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze how financial experts influence asset prices in a sequential trading model. In the model, an expert of unknown ability sends a report about asset values to traders, who then observe a signal about the expert's type. All information about the expert's ability is private to traders and only revealed through trades. When the expert's reputation is sufficiently high, traders ignore their private signal about ability and the market enters a reputational cascade in which no information about the expert reaches the market. Reputational cascades are conducive to asset price bubbles, which eventually result in market crashes when cascades terminate. Rather than being caused by the release of new information, market crashes in our model result from the sudden depreciation of past accumulated information. Finally, we show that reputational cascades are bad for liquidity and induce high price volatility.

Keywords: Informational Cascades; Experts; Reputation; Asset Price Bubbles (search for similar items in EconPapers)
JEL-codes: D82 D83 D84 G14 G20 (search for similar items in EconPapers)
Date: 2013-11-28
New Economics Papers: this item is included in nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/56829/9/MPRA_paper_56829.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:51784

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