Advisors and asset prices
Subtitle: a model of the origins of bubbles
By: Harrison Hong, Jose A. Scheinkman, Wei Xiong.
Contributors: Scheinkman, José Alexandre.; Xiong, Wei, 1975-; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13504.; Working paper series (National Bureau of Economic Research) -- working paper no. 13504.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 46
Subjects: Stocks -- Prices -- Econometric models; Investment advisors -- Behavior
Description: We develop a model of asset price bubbles based on the communication process between advisors and investors. Advisors are well-intentioned and want to maximize the welfare of their advisees (like a parent treats a child). But only some advisors understand the new technology (the tech-savvies); others do not and can only make a downward-biased recommendation (the old-fogies). While smart investors recognize the heterogeneity in advisors, naive ones mistakenly take whatever is said at face value. Tech-savvies inflate their forecasts to signal that they are not old-fogies, since more accurate information about their type improves the welfare of investors in the future. A bubble arises for a wide range of parameters, and its size is maximized when there is a mix of smart and naive investors in the economy. Our model suggests an alternative source for stock over-valuation in addition to investor overreaction to news and sell-side bias.
Notes: "October 2007"

Includes bibliographical references (p. 45-46).

Also available in PDF from the NBER World Wide Web site (www.nber.org).