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Bubbles and Crashes Revisited

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  • Dean Johnson

    ()
    (Michigan Technological University)

  • Patrick Joyce

    ()
    (Michigan Technological University)

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    Abstract

    Based on the pioneering work of Smith, Suchanek, & Williams (1988) experimental researchers have concluded that assets markets are prone to bubbles and crashes in experimental settings. Numerous authors employing the SSW framework have incorporated features designed to reduce or eliminate the observed bubbles (e.g., circuit breakers, short selling, long-lived assets) with little success. This paper alters the underlying process determining the asset's fundamental value by incorporating a new experimental design feature. Its results indicate that asset prices and fundamental value can indeed deviate per SSW?s original results, but the popular interpretation that markets will persistently bubble and crash is misconstrued. Indeed, it appears that rapidly decreasing fundamental values contribute to the bubble. In markets with slowly decreasing, constant or increasing fundamental values, bubbles and crashes are much less common, appearing when the asset price significantly deviates from fundamental value at the onset of the experiment. These interpretations hold in presence or absence of circuit breakers in the market.

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    File URL: http://www.bapress.ca/ref/ref-2012-3/Bubbles%20and%20Crashes%20Revisited.pdf
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    Bibliographic Info

    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 2 (2012)
    Issue (Month): (August)
    Pages: 29-42

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    Handle: RePEc:bap:journl:120303

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    Related research

    Keywords: Bubbles; Crashes; Experimental asset markets;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    2. Noussair, C.N. & Lei , V. & Plott, C., 2001. "Non-speculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality," Open Access publications from Tilburg University urn:nbn:nl:ui:12-381105, Tilburg University.
    3. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185.
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    6. Ackert, Lucy F. & Church, Bryan & Jayaraman, Narayanan, 2001. "An experimental study of circuit breakers: The effects of mandated market closures and temporary halts on market behavior," Journal of Financial Markets, Elsevier, vol. 4(2), pages 185-208, April.
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    10. Reshmaan N. Hussam & David Porter & Vernon L. Smith, 2008. "Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?," American Economic Review, American Economic Association, vol. 98(3), pages 924-37, June.
    11. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    12. Michael Kirchler & Jurgen Huber & Thomas Stockl, 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles," American Economic Review, American Economic Association, vol. 102(2), pages 865-83, April.
    13. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
    14. Lei, Vivian & Noussair, Charles & Plott, Charles R., 2002. "Asset Bubbles and Rationality: Additional Evidence from Capital Gains Tax Experiments," Working Papers 1137, California Institute of Technology, Division of the Humanities and Social Sciences.
    15. Charles Noussair & Stephane Robin & Bernard Ruffieux, 2001. "Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values," Experimental Economics, Springer, vol. 4(1), pages 87-105, June.
    16. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 68(4), pages 509-41, October.
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