1 / 12

Trading Under Uncertainty

This study explores the interactions between arbitrageurs and uninformed investors in financial markets. It measures the ex-ante allocative efficiency of the market and examines the theories related to the dot-com bubble. Key findings reveal that short-sale restrictions and heterogeneous beliefs lead to market overvaluation and inefficient pricing. The research highlights the behavior of arbitrageurs under uncertainty and suggests that risk preferences greatly influence trading decisions. Future experiments may shed light on the persistence of pricing anomalies observed during the tech bubble era.

saxton
Télécharger la présentation

Trading Under Uncertainty

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Trading Under Uncertainty Ankur Pareek Yale School of Management

  2. Motivation • To study the interaction between arbitrageurs and uninformed investors and measure the ex-ante allocation efficiency of the market. • Provide some insight into validity of some of the theories behind the dotcom bubble: • Ofek and Richardson(2003)- short sales restrictions with heterogeneous beliefs explain the internet stock bubble • Pastor and Veronesi (2006)- high uncertainty in future earnings growth rate explained the existing prices of tech stocks in late 90s • Lamont and Stein (2004) – less arbitrage capital for short-selling in rising overvalued market • Understanding the behavior of arbitrageurs under uncertainty

  3. Experimental Design • Create market for stocks of a technology firm Sysco which is based on single technology still in R&D phase • Three sets of traders with different information sets • Arbitrageurs with perfect information about the final dividend realization • Traders with partial/noisy information about the final dividend. • Uninformed traders • Arbitrageurs faced with uncertainty about when the arbitrage window will close (end of period 4 or period 5) • Three sessions with 4 or 5 periods which vary in final dividend and signal received by partially informed traders.

  4. Timeline for a Trading Session Time 0 No information Time 1 4 traders given Noisy info Time 2 4 traders given Perfect info Time 3 Public announcement Noisy info. announced Time 4 or 5 Dividend paid and trading ends

  5. Experimental Results • Prices did not converge to fundamental values when there was overvaluation in the market in session 1 and session 3 • Consistent with Ofek and Richardson (2003): short sell constraints and heterogeneous beliefs • Traders with noisy private information trade on it aggressively immediately after receiving it but don’t trade on it or reverse some of their trades later • Prices converge close to fundamental value when dividend is high

  6. Experimental Results (contd’) • Arbitrageurs did not sell all their securities before the end of period 4 in low dividend sessions 1 and 3 • Action inconsistent with risk aversion/ risk neutrality of arbitrageurs. • Can be explained by risk loving preferences like prospect theory with convex utility over losses w.r.t some benchmark target profit • Arbitrageurs did not indulge in speculative behavior in most of the cases.

  7. Session 1 summary statistics Session 2 summary statistics

  8. Session 3 summary statistics

  9. Conclusion • Heterogeneous investors combined with short-sales constraints could lead to persistence of overpricing. • Perfectly informed arbitrageurs more risk-loving compared to investors with noisy information sets. • Investors with partial information risk-averse as shown by their trading behavior. • Arbitrageurs risk taking in final period can only be justified by risk-loving behavior • Difficult for under pricing to persist in a market with arbitrageurs with perfect information. • Future experiments could help in resolving the debates about the existence and reasons behind the dot-com bubble of 1990s.

More Related