Share Price Formation, Market Exuberance and Financial Stability Under Alternative Accounting Regimes

Journal of Economic Interaction and Coordination, Volume 10 (2015), Issue 2, pp 333-362

17th Annual Workshop on Economic Heterogeneous Interacting Agents (W.E.H.I.A. 2012), ESHIA, University of Pantheon-Assas, Paris, June 21-23, 2012

34 Pages Posted: 12 Jun 2013 Last revised: 19 Oct 2015

See all articles by Yuri Biondi

Yuri Biondi

French National Center for Scientific Research (CNRS)

Pierpaolo Giannoccolo

University of Bologna

Date Written: June 10, 2013

Abstract

This paper develops a theoretical analysis of share market price formation driven by accounting and market structures. Heterogeneous investors are assumed to discover and process fundamental information disclosed by accounting system of share-issuing entity. Information set available to share market investors for decision-making comprises then market-driven and firm-specific (non-market) information. From one side, accounting system provides collective signal of fundamental information; from another side, price system provides collective signal of market-driven information over time. Both jointly drive the formation of aggregate share market prices through limited knowledge, hazard, and social interaction. Numerical simulations are provided under alternative accounting designs (namely, historical cost and fair value accounting regimes), to derive implications and recommendations for the concept and occurrence of speculative bubbles and herd behavior; the cyclical effects of accounting regime on share market dynamics; and the "value relevance" of accounting information and its role in the formation of share market prices over time.

This numerical statistical analysis contributes to shed light on accounting anomalies and fundamental analysis.

Keywords: accounting information, asset pricing model, fundamentalism, chartism, large fluctuations, financial bubbles, market exuberance, market microstructure, historical cost accounting, fair value accounting, accrual anomalies

JEL Classification: C63, D4, E17, E37, G17, M41, M48, G1

Suggested Citation

Biondi, Yuri and Giannoccolo, Pierpaolo, Share Price Formation, Market Exuberance and Financial Stability Under Alternative Accounting Regimes (June 10, 2013). Journal of Economic Interaction and Coordination, Volume 10 (2015), Issue 2, pp 333-362; 17th Annual Workshop on Economic Heterogeneous Interacting Agents (W.E.H.I.A. 2012), ESHIA, University of Pantheon-Assas, Paris, June 21-23, 2012. Available at SSRN: https://ssrn.com/abstract=2277218 or http://dx.doi.org/10.2139/ssrn.2277218

Yuri Biondi (Contact Author)

French National Center for Scientific Research (CNRS) ( email )

IRISSO - University Paris Dauphine PSL
Place Marechal Lattre Tassigny
75016 Paris
France

HOME PAGE: http://yuri.biondi.free.fr/

Pierpaolo Giannoccolo

University of Bologna ( email )

Department of Economics
Piazza Scaravilli, 2
40125 Bologna, 40125
Italy

HOME PAGE: http://www2.dse.unibo.it/giannoccolo

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