Do asset prices aggregate investors’ private information about the ability of financial analysts? We show that as financial analysts become reputable, the market can get trapped: Investors optimally choose to ignore their private information, and blindly follow analyst recommendations. As time goes by and recommendations accumulate, arbitrage based on the inferred ability of analysts may become profitable again. The market can thus be trapped at times and yet be able, in the long run, to sort the pundits from the quacks. However, this process is impaired when asset fundamentals are volatile: in this case, the market might be trapped indefinitely.
Pundits and Quacks
Submitted by Staff on April 08, 2015
|Date: March 1, 2015|
|Author(s): Jesper Rudiger and Adrien Vigier|
|Affiliation: Yale University|