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.
Information Processing Constraints and Asset Mispricing
Article first published online: 28 OCT 2013
© 2013 The Author(s). The Economic Journal © 2013 Royal Economic Society
The Economic Journal
Volume 124, Issue 575, pages 245–268, March 2014
How to Cite
Brown, A. (2014), Information Processing Constraints and Asset Mispricing. The Economic Journal, 124: 245–268. doi: 10.1111/ecoj.12057
- Issue published online: 17 MAR 2014
- Article first published online: 28 OCT 2013
- Accepted manuscript online: 25 MAY 2013 03:17AM EST
- Manuscript Accepted: 6 MAY 2013
- Manuscript Received: 28 OCT 2012
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.