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The purpose of this paper will be to demonstrate instances of persistent asset mispricing. By persistent we mean the existence and achievement of a stable equilibrium where market prices deviate from an underlying fundamental value. These equilibria will be demonstrated through three variations on a general model in which agents make investment decisions on an initial public offering (IPO), given imperfect information on a stock’s true, fundamental value. The first variation holds agents’ beliefs fixed, and trades are conducted “blindly” through a market maker who clears the market by adjusting the stock price. The model establishes a case for initial mispricing in the market, resulting from a sub-optimal quantity of outstanding shares. The second variation allows for agents to update beliefs on price movements, and ultimately identifies an unstable equilibrium where the asset is correctly priced. The third and final variation removes the “blind” game conditions, and allows for agents to update beliefs on public signals generated by other agents’ investment decisions. This latter most model successfully demonstrates persistent asset mispricing, given an initial mispricing in the market.
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Brara, Arjun Kavi, "Persistent Asset Mispricing: Variations on a Simultaneous Move Game" (2016). Senior Projects Spring 2016. 214.
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