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Pundits and Quacks: Financial Experts and Market Feedback

By Jesper Rudiger and Adrien Vigier

Abstract

By choosing whether or not to follow a financial expert's advice, a privately informed trader implicitly screens the ability of this expert. We explore the performance of the resulting feedback mechanism. In the medium run, feedback may altogether break down, enabling experts of low ability to maintain a lasting reputation and affect prices durably. Yet in the long run, the market almost always learns experts' true type. While prices get stuck in the medium run, they thus converge in the long run to the asset's correct valuation.

Topics: D82 - Asymmetric and Private Information; Mechanism Design, D83 - Search; Learning; Information and Knowledge; Communication; Belief, D84 - Expectations; Speculations, G14 - Information and Market Efficiency; Event Studies, G20 - General
Year: 2014
OAI identifier: oai:mpra.ub.uni-muenchen.de:56829

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