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Abstract

Recent studies suggest that the type of strategic environment or expectation feedback may have a large impact on whether the market learns the rational fundamental price. We present an experiment where the fundamental price experiences large unexpected shocks. Markets with negative expectation feedback (strategic substitutes) quickly converge to the new fundamental, while markets with positive expectation feedback (strategic complements) do not converge, but show under-reaction in the short run and over-reaction in the long run. A simple evolutionary selection model of individual learning explains these differences in aggregate outcomes.

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File URL: http://www1.fee.uva.nl/cendef/publications/papers/BHST2010_June.pdf
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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 10-07.

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Date of creation: 2010
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Handle: RePEc:ams:ndfwpp:10-07

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
Email:
Web page: http://www.fee.uva.nl/cendef/
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Find related papers by JEL classification:

• C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
• G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
• D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
• D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
• E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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Cited by:

1. Anufriev, M. & Hommes, C.H., 2011. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments (revised version of WP 09-09)," CeNDEF Working Papers 11-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
2. Bao, T. & Duffy, J. & Hommes, C.H., 2011. "Learning, Forecasting and Optimizing: an Experimental Study," CeNDEF Working Papers 11-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
   
   • Te Bao & John Duffy & Cars Hommes, 2012. "Learning, Forecasting and Optimizing: An Experimental Study," Tinbergen Institute Discussion Papers 12-015/1, Tinbergen Institute.
3. Eizo Akiyama & Nobuyuki Hanaki & Ryuchiro Ishikawa, 2012. "Effect of uncertainty about others’ rationality in experimental asset markets," AMSE Working Papers 1234, Aix-Marseille School of Economics, Marseille, France.
4. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2012. "Effect of Uncertainty about Others' Rationality in Experimental Asset Markets: An Experimental Analysis," Working Papers halshs-00793613, HAL.

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