Explaining Asset Mispricing Using the Resale Option and Inflation Illusion

50 Pages Posted: 30 Mar 2010

See all articles by Darren K. Hayunga

Darren K. Hayunga

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Peter P. Lung

University of Texas at Arlington

Multiple version iconThere are 3 versions of this paper

Date Written: March 18, 2010

Abstract

We investigate the overconfidence theory and inflation-illusion hypothesis of asset mispricing. Both concepts address subjective asset valuation but place the impetus on differing explanations within the standard dividend-growth model. We find that one of the theoretical outcomes of overconfidence - asset turnover - consistently explains mispricing in U.S. housing markets. Further, we find that asset turnover subsumes expected inflation in certain specifications; suggesting that dispersion in investors' beliefs is a better explanation of asset mispricing than the investors' inability to properly discount future cash flows.

Keywords: Asset Mispricing; Heterogeneous Beliefs, Resale Option, Overconfidence Theory, Inflation Illusion, Asset Turnover

JEL Classification: E31, G12, G14

Suggested Citation

Hayunga, Darren K. and Lung, Peter P., Explaining Asset Mispricing Using the Resale Option and Inflation Illusion (March 18, 2010). Available at SSRN: https://ssrn.com/abstract=1574465 or http://dx.doi.org/10.2139/ssrn.1574465

Darren K. Hayunga (Contact Author)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-1365 (Phone)

Peter P. Lung

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

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