Abstract. The joint-hypothesis problem makes economic fundamentals and mispricing hard to disentangle in equity markets. In this paper, we propose a novel solution to this issue. We study a large virtual asset market where fundamentals are predetermined and publicly known, which allows us to directly identify the impact of investor behavior on price formation. We find that several well-established determinants of stock returns also operate in this market, despite the absence of systematic risk. In additional tests, we find a positive correlation between market valuations and real-life equity prices. Our results suggest that real-world stock returns include a substantial behavioral component.
Coauthor. Remco Zwinkels (VU Amsterdam, Tinbergen Institute).
Manuscript. You can download the paper here.
Presentations. Workshop on Economic Science with Heterogeneous Interacting Agents in Suzhou, Radboud University Nijmegen, EDHEC Business School, the University of Florence, the University of Siena, the Auckland University of Technology, the Workshop on Alternative Investments at the University of Luxembourg, the Israel Behavioral Finance Conference at Tel Aviv University, HEC Liège, the American Finance Association meetings, Kingston University London, Utrecht University, the Behavioral Finance Working Group Conference at Queen Mary University of London, the ECASE seminar series at Erasmus University Rotterdam, and VU Amsterdam.