Investment Horizons and Price Indeterminacy in Financial Markets

57 Pages Posted: 5 Jun 2015 Last revised: 17 Jun 2015

See all articles by Shinichi Hirota

Shinichi Hirota

Waseda University - Graduate School of Commerce

Juergen Huber

University of Innsbruck; University of Vienna - Department of Finance

Thomas Stock

University of Innsbruck - Department of Economics

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: June 3, 2015

Abstract

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

Suggested Citation

Hirota, Shinichi and Huber, Juergen and Stock, Thomas and Sunder, Shyam, Investment Horizons and Price Indeterminacy in Financial Markets (June 3, 2015). Cowles Foundation Discussion Paper No. 2001. Available at SSRN: https://ssrn.com/abstract=2613945 or http://dx.doi.org/10.2139/ssrn.2613945

Shinichi Hirota

Waseda University - Graduate School of Commerce ( email )

1-6-1, Nishi-Waseda
Shinjuku-ku, Tokyo 169-8050
Japan
+81-3-5286-2088 (Phone)
+81-3203-7067 (Fax)

Juergen Huber

University of Innsbruck ( email )

Universit├Ątsstra├če 15
Innsbruck, Innsbruck 6020
Austria

University of Vienna - Department of Finance ( email )

Bruenner Strasse 72
Vienna, 1210
Austria

Thomas Stock

University of Innsbruck - Department of Economics ( email )

Austria

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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