The Impact of Endogenously Determined Uncertainty About Future Mispricings and Investigatory Outcomes
32 Pages Posted: 20 Aug 2013
Date Written: August 19, 2013
This paper models market mispricings as a function of subjective predictions about the endogenously determined future trades of other investors. Utilizing only a very general set of very unrestrictive assumptions, a single boundary condition with only a few variables is deduced that facilitates rational analysis of the multitude of ambiguous factors and complex interrelationships that influence investment decisions. The model, which incorporates the uncertainty of the outcome of an investment analysis that is shown to explain the neglected firm effect, supplies new insights on market price cycles and patterns.
Keywords: arbitrage, market efficiency, uncertainty, investment analysis, cycles
JEL Classification: G12
Suggested Citation: Suggested Citation