How do markets react to fundamental shocks? : An experimental analysis on underreaction and momentum


Weber, Martin ; Welfens, Frank


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URL: http://ub-madoc.bib.uni-mannheim.de/2526
URN: urn:nbn:de:bsz:180-madoc-25264
Document Type: Working paper
Year of publication: 2007
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: G11 D81 D14 C91 ,
Subject headings (SWD): Eigendynamik , Wirtschaft , Experiment , Disposition
Abstract: We perform a market experiment to investigate how average transaction prices react to the arrival of new information. Following a positive shock in fundamental value, prices underreact strongly; following negative shocks we find evidence of a much less pronounced underreaction. After the shock, prices in both situations slowly drift towards the new fundamental value, leading to a characteristic momentum pattern. Controlling for investors’ individual disposition effects we form high and low disposition markets and prove both underreaction and momentum to be stronger in the high disposition group. While evidence is mainly in favor of Grinblatt and Han (2005), we conclude based on our underreaction finding that positive and negative shocks are not two sides of the same coin and encourage future studies to disentangle the asymmetry between the two situations more carefully.
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Weber, Martin ; Welfens, Frank (2007) How do markets react to fundamental shocks? : An experimental analysis on underreaction and momentum. Open Access [Working paper]
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