Information Processing Constraints and Asset Mispricing

Authors


  • I thank Frederic Vermeulen and two anonymous referees for their extensive comments and suggestions. This study also benefited from the input of Fabrizio Adriani, Axel Sonntag, Fuyu Yang and an audience at the University of East Anglia. All errors are my own.

  • Correction Note: This article was first published online on the 28th of October 2013, under a subscription publication licence. The article has since been made OnlineOpen, and the copyright line and licence statement was therefore updated in April 2015.

Abstract

I analyse a series of natural quasi-experiments – centred on betting exchange data on the Wimbledon Tennis Championships – to determine whether information processing constraints are partially responsible for mispricing in asset markets. I find that the arrival of information during each match leads to substantial mispricing between two equivalent assets, and that part of this mispricing can be attributed to differences in the frequency with which the two prices are updated inplay. This suggests that information processing constraints force the periodic neglect of one of the assets, thereby causing substantial, albeit temporary, mispricing in this simple asset market.

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