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Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation

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Author Info
Heemeijer, P. () (Universiteit van Amsterdam)
Hommes, C.H. (Universiteit van Amsterdam)
Sonnemans, J. (Universiteit van Amsterdam)
Tuinstra, J. (Universiteit van Amsterdam)

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Abstract

The evolution of many economic variables is affected by expectations that economic agents have with respect to the future development of these variables. Here we show, by means of laboratory experiments, that market behavior depends to a large extent on how the realized market price responds to an increase in average price expectations. If it responds by decreasing, as in commodity markets, prices converge quickly to their equilibrium value, confirming the rational expectations hypothesis. If the realized price increases after an increase of average expectations, as is typical for financial markets, large fluctuations in realized prices are likely.

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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 06-05.

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Date of creation: 2006
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Handle: RePEc:ams:ndfwpp:06-05

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
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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.:
  1. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, 04. [Downloadable!] (restricted)
    Other versions:
  2. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & Van De Velden, Henk, 2007. "Learning In Cobweb Experiments," Macroeconomic Dynamics, Cambridge University Press, vol. 11(S1), pages 8-33, November. [Downloadable!]
  3. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2005. "Coordination of Expectations in Asset Pricing Experiments," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(3), pages 955-980. [Downloadable!] (restricted)
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  4. Arifovic, Jasmina, 1994. "Genetic algorithm learning and the cobweb model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 3-28, January. [Downloadable!] (restricted)
  5. Canoles, W. Bruce & Thompson, Sarahelen R. & Irwin, Scott H. & France, Virginia G., 1997. "An Analysis Of The Profiles And Motivations Of Habitual Commodity Speculators," ACE OFOR Reports 14768, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics. [Downloadable!]
    Other versions:
  6. Garber, Peter M, 1990. "Famous First Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 35-54, Spring. [Downloadable!] (restricted)
  7. Jean-Robert Tyran & Ernst Fehr, 2002. "Limited Rationality and Strategic Interaction - The Impact of the Strategic Environment on Nominal Inertia," University of St. Gallen Department of Economics working paper series 2002 2002-25, Department of Economics, University of St. Gallen. [Downloadable!]
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  8. C.H. Hommes & J.H. Sonnemans & J. Tuinstra & H. van de Velde, 2003. "Learning in Cobweb Experiments," Tinbergen Institute Discussion Papers 03-020/1, Tinbergen Institute. [Downloadable!]
  9. repec:att:wimass:199530r is not listed on IDEAS
  10. Hugh Kelley & Daniel Friedman, 2002. "Learning to Forecast Price," Economic Inquiry, Oxford University Press, vol. 40(4), pages 556-573, October.
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  1. Cars Hommes & Thomas Lux, 2008. "Individual Expectations and Aggregate Behavior in Learning to Forecast Experiments," Kiel Working Papers 1466, Kiel Institute for the World Economy. [Downloadable!]
  2. Michael W.M. Roos & Wolfgang J. Luhan, 2008. "Are Expectations Formed by the Anchoring-and-adjustment Heuristic? – An Experimental Investigation," Ruhr Economic Papers 0054, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  3. Hommes, C.H., 2007. "Bounded Rationality and Learning in Complex Markets," CeNDEF Working Papers 07-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  4. Dindo, P.D.E. & Tuinstra, J., 2006. "A Behavioral Model for Participation Games with Negative Feedback," CeNDEF Working Papers 06-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
  6. Michael W.M. Roos & Wolfgang J. Luhan, 2008. "As if or What? – Expectations and Optimization in a Simple Macroeconomic Environment," Ruhr Economic Papers 0055, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
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