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Asset price dynamics when traders care about reputation

Dasgupta, Amil and Prat, Andrea (2005) Asset price dynamics when traders care about reputation. 5372. Centre for Economic Policy Research, London, UK.

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Abstract

What are the equilibrium features of a dynamic financial market where traders care about their reputation for ability? We modify a standard sequential trading model to study a financial market with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. This finding, which stands in sharp contrast with the results for standard financial markets, is due to the fact that our traders face an endogenous incentive to behave in a conformist manner. We show that there exist equilibria where career-concerned agents trade in a conformist manner when prices have risen or fallen sharply. We also show that each asset carries an endogenous reputational benefit or cost, which may lead to systematic mispricing if asset supply is not infinitely elastic

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2005 Amil Dasgupta and Andrea Prat
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G0 - General
C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory
Sets: Departments > Accounting and Finance
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 5372
Date Deposited: 30 May 2008 15:32
URL: http://eprints.lse.ac.uk/5210/

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