Measuring Mispricing in Experimental Asset Markets

15 Pages Posted: 10 Sep 2014 Last revised: 27 Jun 2015

See all articles by Owen Powell

Owen Powell

University of Vienna - Department of Economics; Vienna Center for Experimental Economics

Date Written: June 26, 2015

Abstract

Mispricing (the difference between prices and their underlying fundamental values) is an important characteristic of markets. The literature on the topic consists of many different measures. This state of affairs is unsatisfactory, since it is not clear to which extent results are sensitive to the choice of measure. This paper shows that numeraire independence is an important condition that disallows many previous arithmetic mean-based measures. Furthermore, under additional assumptions it can be shown that the geometric mean is the only such aggregation function to satisfy numeraire independence. This leads to the proposal of two new measures of mispricing, Geometric Deviation (for overpricing) and Geometric Absolute Deviation (for absolute mispricing). An application illustrates the potential impact of these new measures on previous experimental results.

Keywords: Asset markets, Averaging methods, Mispricing measures

JEL Classification: C43, C90, D49, D84, G14

Suggested Citation

Powell, Owen, Measuring Mispricing in Experimental Asset Markets (June 26, 2015). Available at SSRN: https://ssrn.com/abstract=2493502 or http://dx.doi.org/10.2139/ssrn.2493502

Owen Powell (Contact Author)

University of Vienna - Department of Economics ( email )

Bruennerstrasse 72
Vienna, A-1210
Austria

Vienna Center for Experimental Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1090
Austria

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