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Price Bubbles with Discounting: A Web-Based Classroom Experiment

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Author Info

  • AJ A. Bostian
  • Charles A. Holt

Abstract

The authors describe a Web-based classroom experiment with two assets: cash and a stock that pays a random dividend. The interest rate on cash, coupled with a well-chosen final redemption value for the stock, induces a flat trajectory for the fundamental value of the stock. However, prices typically rise above this value during a session. The bubbles and crashes that occur in this experiment can stimulate a discussion of asset valuation, discounting, and pricing patterns that are determined by expectations and "animal spirits."

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File URL: http://hdl.handle.net/10.3200/JECE.40.1.027-037
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of Economic Education.

Volume (Year): 40 (2009)
Issue (Month): 1 (January)
Pages: 27-37

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Handle: RePEc:taf:jeduce:v:40:y:2009:i:1:p:27-37

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Cited by:
  1. Bao, T. & Hommes, C.H. & Makarewicz, T.A., 2014. "Bubble Formation and (In)efficient Markets in Learning-to-Forecast and -Optimize Experiments," CeNDEF Working Papers 14-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  2. Giusti, Giovanni & Jiang, Janet Hua & Xu, Yiping, 2012. "Eliminating Laboratory Asset Bubbles by Paying Interest on Cash," MPRA Paper 37321, University Library of Munich, Germany.
  3. Giovanni Giusti & Janet Hua Jiang & Yiping Xu, 2014. "Interest on Cash, Fundamental Value Process and Bubble Formation on Experimental Asset Markets," Working Papers 14-18, Bank of Canada.
  4. Stefan Palan, 2013. "A Review of Research into Smith, Suchanek and Williams Markets," Working Paper Series, Social and Economic Sciences 2013-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

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