IMF Working Papers

Asset Mispricing Due to Cognitive Dissonance

By Bernhard Eckwert, Burkhard Drees

January 1, 2005

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Bernhard Eckwert, and Burkhard Drees. Asset Mispricing Due to Cognitive Dissonance, (USA: International Monetary Fund, 2005) accessed December 9, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The behavior of equity prices is analyzed in a general equilibrium model where agents have preferences not only over consumption but also (implicitly) over their beliefs. To alleviate cognitive dissonance, investors endogenously choose to ignore information that conflicts too much with their ex ante expectations. Depending on the new information that is released, systematic overvaluation and undervaluation of equity prices arise, as well as too much and too little equity price volatility. The distortion in the asset pricing process is closely related to the precision of the information.

Subject: Asset prices, Price structures, Securities markets, Stock markets, Stocks

Keywords: Mover accent, WP

Publication Details

  • Pages:

    30

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2005/009

  • Stock No:

    WPIEA2005009

  • ISBN:

    9781451860283

  • ISSN:

    1018-5941