An Explanation of Inefficiency in Markets and a Justification for Buy-and-Hold Strategies

A model is presented in which market prices systematically understate fundamental values. The result follows from assumptions that the market is organized along auction lines with private information and is imperfect in that owners are occasionally forced to sell in order to raise cash for exogenous reasons. Because of the auction format, sellers do not receive the entire value of the surplus associated with their assets and this becomes compounded in the market price through expectations of forced liquidations in the future. One by-product is that buy-and-hold strategies are optimal in certain variants of this model.