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Price bubbles sans dividend anchors: Evidence from laboratory stock markets

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  • Hirota, Shinichi
  • Sunder, Shyam

Abstract

We experimentally explore how investor decision horizons influence the formation of stock prices. We find that in long-horizon sessions, where investors collect dividends till maturity, prices converge to the fundamental levels derived from dividends through backward induction. In short-horizon sessions, where investors exit the market by receiving the price (not dividends), prices levels and paths become indeterminate and lose dividend anchors; investors tend to form their expectations of future prices by forward, not backward, induction. These laboratory results suggest that investors' short horizons and the consequent difficulty of backward induction are important contributors to the emergence of price bubbles.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 6 (June)
Pages: 1875-1909

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:6:p:1875-1909

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References

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Citations

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Cited by:
  1. Sonnemans, Joep & Tuinstra, Jan, 2010. "Positive expectations feedback experiments and number guessing games as models of financial markets," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 964-984, December.
  2. repec:wyi:wpaper:002023 is not listed on IDEAS
  3. Joep Sonnemans & Jan Tuinstra, 2008. "Positive Expectations Feedback Experiments and Number Guessing Games as Models of Financial Markets," Tinbergen Institute Discussion Papers 08-076/1, Tinbergen Institute.
  4. Yuri Biondi & Pierpaolo Giannoccolo & Serge Galam, 2011. "The formation of share market prices under heterogeneous beliefs and common knowledge," Papers 1105.3228, arXiv.org.
  5. repec:fee:wpaper:1102 is not listed on IDEAS
  6. Gregory Waymire & Sudipta Basu, 2011. "Economic crisis and accounting evolution," Accounting and Business Research, Taylor & Francis Journals, vol. 41(3), pages 207-232, August.
  7. Schoenberg, Eric J. & Haruvy, Ernan, 2012. "Relative performance information in asset markets: An experimental approach," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1143-1155.
  8. Shachat, Jason & Srivinasan, Anand, 2011. "Informational price cascades and non-aggregation of asymmetric information in experimental asset markets," MPRA Paper 30308, University Library of Munich, Germany.
  9. Biondi, Yuri & Giannoccolo, Pierpaolo & Galam, Serge, 2012. "Formation of share market prices under heterogeneous beliefs and common knowledge," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(22), pages 5532-5545.
  10. Michailova, Julija, 2010. "Overconfidence, Risk Aversion and Individual Financial Decisions in Experimental Asset Markets," MPRA Paper 53114, University Library of Munich, Germany, revised Jan 2014.
  11. Yuri Biondi & Simone Righi, 2013. "What does the financial market pricing do? A simulation analysis with a view to systemic volatility, exuberance and vagary," Papers 1312.7460, arXiv.org.
  12. Wei Xiong & Jialin Yu, 2009. "The Chinese Warrants Bubble," NBER Working Papers 15481, National Bureau of Economic Research, Inc.
  13. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2009. "Asset Bubbles without Dividends - An Experiment," Working Papers 0439, University of Heidelberg, Department of Economics.
  14. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
  15. Palan, Stefan, 2010. "Digital options and efficiency in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 506-522, September.

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