Risk, Return, and Sentiment in a Virtual Asset Market
53 Pages Posted: 23 Feb 2021 Last revised: 11 May 2022
Date Written: May 11, 2022
The joint-hypothesis problem casts doubt on the results of market efficiency research. Specifically, it is hard to assess to what extent financial markets reflect economic fundamentals or mispricing. To address this issue, we study price formation in a large virtual asset market where fundamentals are predetermined and publicly known. We find that a number of well-established determinants of returns from the real world also affect asset prices in this market, despite the absence of systematic risk. The results suggest that prices in real financial markets include a substantial behavioral component, which is likely underestimated in canonical asset pricing tests.
Keywords: Asset pricing; Market efficiency; Natural experiment
JEL Classification: G14; G41; C93
Suggested Citation: Suggested Citation