FRIC/Finance Seminar with Peter Norman Sørensen, FRIC and Copenhagen University
FRIC Center for Financial Friction and the Department of Finance are proud to announce the upcoming seminar with Peter Norman Sørensen, Center for Financial Frictions and Copenhagen University.
Peter will present:
Price Reaction to Information with Heterogeneous Beliefs and Wealth Effects: Underreaction, Momentum, and Reversal
Marco Ottavianiy, Bocconi University
Peter Norman Sørensen, Center for Financial Frictions and Copenhagen University
This paper analyzes how asset prices in a binary market react to information when traders have heterogeneous prior beliefs. We show that the competitive equilibrium price underreacts to information when there is a bound to the amount of money traders are allowed to invest. Underreaction is more pronounced when prior beliefs are more heterogeneous. Even in the absence of exogenous bounds on the amount traders can invest, prices underreact to information provided that traders become less risk averse as their wealth increases. In a dynamic setting, underreaction results in initial momentum and then overreaction and reversal in the long run.