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Coordination of Expectations in Asset Pricing Experiments (Version March 2004)

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Author Info
Hommes, C.H.
Sonnemans, J.
Tuinstra, J.
Velden, H. van de () (Universiteit van Amsterdam)

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Abstract

We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand of the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from individual expectations. Each market is populated by six subjects and a small fraction of fundamentalist traders. Realized prices differ significantly from fundamental values. In some groups the asset price converges slowly to the fundamental price, in other groups there are regular oscillations around the fundamental price. In all groups participants coordinate on a common prediction strategy. The individual prediction strategies can be estimated and correspond, for a large majority of participants, to simple linear autoregressive forecasting rules.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 04-02.

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Date of creation: 2004
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Handle: RePEc:ams:ndfwpp:04-02

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