Abstract
This research analyzes the influence of dispersion of valuations on financial markets, taking several aspects of real financial market into consideration (such as financial constraints, investment strategies and so on). As a result of intensive experiments in the market, we made the following findings: (1) Dispersion of fundamentalists' valuations has little effect on the market when financial constraints are absent; (2) When financial constraints — such as short-sale constraints — are introduced, certain situations arise in which deviations from fundamental values become larger, according to the level of the dispersion of valuations; (3) A passive investment strategy, as is consistent with traditional financial theory, is valid even when the introduction of financial constraints causes market prices to deviate significantly from fundamental values. These results contribute to clarifying the mechanism of price fluctuations in financial markets and are notable from both academic and practical view points.
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