Abstract
This paper presents an equity market where the value of a new technology is infrequently
observable while the equity claim of the asset is continuously traded. We clear the stock market
between two optimal asset allocation strategies, speculative vs. fundamental, adopted by risk-averse
investors who differ in their risk-aversion. The stock price path maintains a potential for endogenous
bubbles or under-pricing vs. the asset as a function of total funds invested in the stock by each
investor type. Bubbles grow exponentially if speculation dominates but if the fundamental strategy
dominates, the stock’s growth rate and its volatility will decline.
observable while the equity claim of the asset is continuously traded. We clear the stock market
between two optimal asset allocation strategies, speculative vs. fundamental, adopted by risk-averse
investors who differ in their risk-aversion. The stock price path maintains a potential for endogenous
bubbles or under-pricing vs. the asset as a function of total funds invested in the stock by each
investor type. Bubbles grow exponentially if speculation dominates but if the fundamental strategy
dominates, the stock’s growth rate and its volatility will decline.
| Original language | English |
|---|---|
| Pages (from-to) | 83-106 |
| Number of pages | 24 |
| Journal | The Journal of Entrepreneurial Finance & Business Ventures |
| Volume | 12 |
| Issue number | 1 |
| State | Published - Aug 2007 |