Money Illusion and Housing Frenzies

A reduction in inflation can fuel run-ups in housing pricesif people suffer from money illusion. For example, investorswho decide whether to rent or buy a house by simply comparingmonthly rent and mortgage payments do not take into accountthe fact that inflation lowers future real mortgage costs. Wedecompose the price–rent ratio into a rational component—meantto capture the "proxy effect" and risk premia—and an impliedmispricing. We find that inflation and nominalinterest ratesexplain a large share of the time series variation of the mispricing,and that the tilt effect is very unlikely to rationalize thisfinding.     

Information Leakage and Market Efficiency

This article analyzes the effects of information leakage ontrading behavior and market efficiency. A trader who receivesa noisy signal about a forthcoming public announcement can exploitit twice. First, when he receives it, and second, after thepublic announcement since he knows best the extent to whichhis information is already reflected in the pre-announcementprice. Given his information he expects the price to overshootand intends to partially revert his trade. While informationleakage makes the price process more informative in the short-run,it reduces its informativeness in the long-run. The analysissupports Securities and Exchange Commission's Regulation FairDisclosure.