Can Earning Fixated Traders Survive in a Competitive Securities Market?: Implication for Sustained Price Anomalies and Mark to Market Accounting

33 Pages Posted: 27 Feb 2011

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Guo Ying Luo

McMaster University

Date Written: February 26, 2011

Abstract

We model the dynamic survival of earning fixated traders in a competitive security market populated by heterogeneous investors that allows for learning and arbitrage. We prove that in the absence of noise traders, rational investors will drive out earnings fixated investors from the market in the long-run. More interestingly, we show that in a market with noise traders, some proportion of earning fixated traders survive in long-run equilibrium for all feasible model parameter values. Furthermore, under no circumstances can the earning fixated traders be driven out of the market completely. On the contrary, for some parameter values, the earning fixated traders drive out the rational traders entirely. These results obtain because in a competitive security market with noise traders, earning fixated traders adopt a trading strategy that is more effective than the trading strategy of rational traders at exploiting the misvaluations created by noise traders. These results rationalize the long-run sustainability of common pricing anomalies. They also highlight a potential benefit to society of mark to market accounting.

Keywords: Earning Fixated Traders, Survivorship, Mark to Market Accounting

Suggested Citation

Callen, Jeffrey L. and Luo, Guo Ying, Can Earning Fixated Traders Survive in a Competitive Securities Market?: Implication for Sustained Price Anomalies and Mark to Market Accounting (February 26, 2011). Available at SSRN: https://ssrn.com/abstract=1770422 or http://dx.doi.org/10.2139/ssrn.1770422

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Guo Ying Luo

McMaster University

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905 525 9140 ext. 23983 (Phone)

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