Cheap TIPS or Expensive Inflation Swaps?: Mispricing in Real Asset Markets

Auditors are faced with the dilemma of inferring materiality based, in part, on whether a given level of financial misstatement will affect the decisions of statement users. Misstatements in accounting information that are below the materiality threshold are not expected to change users' assessments of a company's economic condition. While the auditing profession accepts materiality in concept, its application in practice is more controversial. In certain settings, the nature of a misstatement, such as changing a small profit into a loss, may affect an auditor's materiality judgment. However, in many cases the magnitude of the misstatement is a critical factor in judging materiality. We focus solely on the issue of magnitude and examine whether financial misstatements that are at or below commonly applied materiality thresholds result in market prices that differ from those resulting from correctly stated information. We conduct a series of 12 experimental asset markets each consisting of 12 independent three-minute trading periods with six traders in each market. We then compare prices for companies generated by markets that are provided either correctly stated information, information containing misstatements that would typically be considered immaterial, or information containing material misstatements. Results indicate that undisclosed misstatements within materiality thresholds that are consistent with current audit practice do not affect market prices, while misstatements well above these thresholds do.

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Emergent volatility in asset markets with heterogeneous agents

Discrete Dynamics in Nature and Society ◽

10.1155/s1026022601000188 ◽

2001 ◽

Vol 6 (3) ◽

pp. 171-180 ◽

Cited By ~ 8

Author(s):

Honggang Li ◽

J. Barkley Rosser

Keyword(s):

Heterogeneous Agents ◽

Moving Average ◽

Asset Price ◽

Market Price ◽

Switching Behavior ◽

Asset Markets ◽

Technical Trading Rules ◽

Market Participants ◽

Fundamental Value ◽

Discrete Formulation

This paper examines the emergence of complex volatility in dynamic asset markets when there are heterogeneous agents. A discrete formulation is studied with two categories of market participants, fundamentalist traders who buy when the asset price is below the fundamental value and sell when it is above and noise traders who use moving average technical trading rules that can lead them to chase trends. Agents switch from one type of strategy to the other according to relative returns. A variety of outcomes are studied using numerical simulation, including variation of market price responsiveness to changes in excess demand, in switching behavior, and the introduction of noise. Bifurcation analysis of certain parameters is presented.

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On the existence of competitive equilibrium in frictionless and incomplete stochastic asset markets

Mathematics and Financial Economics ◽

10.1007/s11579-017-0190-3 ◽

2017 ◽

Vol 11 (4) ◽

pp. 455-477 ◽

Cited By ~ 13

Author(s):

Robert Jarrow

Keyword(s):

Competitive Equilibrium ◽

Asset Markets

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The Role of Trading Frictions in Real Asset Markets

The American Economic Review ◽

10.1257/aer.101.4.1106 ◽

2011 ◽

Vol 101 (4) ◽

pp. 1106-1143 ◽

Cited By ~ 64

Author(s):

Alessandro Gavazza

Keyword(s):

Empirical Analysis ◽

Capacity Utilization ◽

Asset Markets ◽

Asset Market ◽

Commercial Aircraft ◽

Average Productivity ◽

Thin Market ◽

Asset Allocations ◽

The Empirical Analysis

This paper investigates how trading frictions vary with the thickness of the asset market by examining patterns of asset allocations and prices in commercial aircraft markets. The empirical analysis indicates that assets with a thinner market are less liquid—i.e., more difficult to sell. Thus, firms hold on longer to them amid profitability shocks. Hence, when markets for assets are thin, firms' average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are lower and have a higher dispersion. (JEL A12, L11, L93)

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