CFDP 2001

Investment Horizons and Price Indeterminacy in Financial Markets

Author(s): 

Publication Date: June 2015

Pages: 56

Abstract: 

We examine how different investment horizons, and consequently the number of hands through which a security passes during its life, affect prices in a laboratory market populated by overlapping generations of investors. We find that (i) price deviations are larger in markets populated only by short-horizon investors compared to markets with long-horizon investors; (ii) for a given maturity of security, price deviations increase as investment horizons shrink (and frequency of transfers increases); and (iii) short investment horizons create upward pressure on prices when liquidity is high and downward pressure when liquidity is low.

Keywords: 

Experimental finance, Short-horizon investors, Rational expectations, Price efficiency, Overlapping generations

JEL Classification Codes:  C91, G11, G12