Measuring Mispricing in Experimental Asset Markets
15 Pages Posted: 10 Sep 2014 Last revised: 27 Jun 2015
Date Written: June 26, 2015
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: Suggested Citation