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- Title
Feedback Effects and Asset Prices.
- Authors
OZDENOREN, EMRE; YUAN, KATHY
- Abstract
Feedback effects from asset prices to firm cash flows have been empirically documented. This finding raises a question for asset pricing: How are asset prices determined if price affects fundamental value, which in turn affects price? In this environment, by buying assets that others are buying, investors ensure high future cash flows for the firm and subsequent high returns for themselves. Hence, investors have an incentive to coordinate, which may generate self-fulfilling beliefs and multiple equilibria. Using insights from global games, we pin down investors' beliefs, analyze equilibrium prices, and show that strong feedback leads to higher excess volatility.
- Subjects
MATHEMATICAL models of finance; MATHEMATICAL models of investments; ECONOMIC equilibrium; RATE of return; CASH flow; MARKET volatility
- Publication
Journal of Finance (Wiley-Blackwell), 2008, Vol 63, Issue 4, p1939
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.2008.01378.x