Dotcom Mania: A Survey of Market Efficiency in the Internet Sector

61 Pages Posted: 9 May 2001

See all articles by Eli Ofek

Eli Ofek

New York University (NYU) - Department of Finance

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Date Written: April 2001

Abstract

This paper provides a survey of some existing as well as new evidence of the relation between market prices and fundamentals in the internet sector over the period January 1998 to February 2000. Appealing to results across a broad class of outcomes, we demonstrate a strong, circumstantial case against market rationality. In particular, we investigate (i) the level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to information-based events, (iii) internet-related anomalies, and (iv) the volatility of internet prices. As a potential explanation, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that "optimistic" investors overwhelm "pessimistic" ones, leading to prices not reflecting fundamental values. Empirical support for this model is provided using data from the stock shorting market.

Keywords: Market efficiency, investments, event study, Internet

JEL Classification: G12, G14

Suggested Citation

Ofek, Eli and Richardson, Matthew P., Dotcom Mania: A Survey of Market Efficiency in the Internet Sector (April 2001). Available at SSRN: https://ssrn.com/abstract=268311 or http://dx.doi.org/10.2139/ssrn.268311

Eli Ofek (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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