Investment Horizons and Price Indeterminacy in Financial Markets
57 Pages Posted: 5 Jun 2015 Last revised: 17 Jun 2015
Date Written: June 3, 2015
We examine how different investment horizons, and consequently the number of hands through which a security passes during its life, affect prices in a laboratory market populated by overlapping generations of investors. We find that (i) price deviations are larger in markets populated only by short-horizon investors compared to markets with long-horizon investors; (ii) for a given maturity of security, price deviations increase as investment horizons shrink (and frequency of transfers increases); and (iii) short investment horizons create upward pressure on prices when liquidity is high and downward pressure when liquidity is low.
Keywords: Experimental finance, Short-horizon investors, Rational expectations, Price efficiency, Overlapping generations
JEL Classification: C91, G11, G12
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