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Bubbles and Experience: An Experiment with a Steady Inflow of New Traders

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  • Huan Xie

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  • Jipeng Zhang
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Abstract

We revisit the effect of traders' experience on price bubbles by introducing either one-third or two-thirds steady inflow of new traders in the repeated experimental asset markets. We find that bubbles are not significantly abated by the third repetition of the market with the inflow of new traders. The relative importance of experience to the formation of bubbles depends on the proportion of new traders in the market. Our findings identify a market environment where experience is not sufficient to eliminate price bubbles.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2012s-01.

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Date of creation: 01 Jan 2012
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Handle: RePEc:cir:cirwor:2012s-01

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Keywords: Price bubbles; experience; inflow of new traders; experiments;

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  1. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 68(4), pages 509-41, October.
  2. Mark van Boening & Vernon L. Smith & Charissa P. Wellford, 2000. "Dividend timing and behavior in laboratory asset markets," Economic Theory, Springer, vol. 16(3), pages 567-583.
  3. Stephanie Wang, 2012. "Speculative Overpricing in Asset Markets with Information Flows," Working Papers 489, University of Pittsburgh, Department of Economics, revised Jan 2012.
  4. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  5. Ernan Haruvy & Yaron Lahav & Charles N. Noussair, 2007. "Traders' Expectations in Asset Markets: Experimental Evidence," American Economic Review, American Economic Association, vol. 97(5), pages 1901-1920, December.
  6. Robin Greenwood & Stefan Nagel, 2008. "Inexperienced Investors and Bubbles," NBER Working Papers 14111, National Bureau of Economic Research, Inc.
  7. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
  8. Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1119-1157, 06.
  9. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185.
  10. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-59, July.
  11. Reshmaan N. Hussam & David Porter & Vernon L. Smith, 2008. "Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?," American Economic Review, American Economic Association, vol. 98(3), pages 924-37, June.
  12. Cary Deck & David Porter & Vernon L. Smith, 2011. "Double Bubbles in Assets Markets with Multiple Generations," Working Papers 11-10, Chapman University, Economic Science Institute.
  13. Charles Noussair & Steven Tucker, 2006. "Futures Markets And Bubble Formation In Experimental Asset Markets ," Pacific Economic Review, Wiley Blackwell, vol. 11(2), pages 167-184, 06.
  14. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2010. "Bubble measures in experimental asset markets," Experimental Economics, Springer, vol. 13(3), pages 284-298, September.
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Cited by:
  1. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2013. "How Do Experienced Traders Respond to Inflows of Inexperienced Traders? An Experimental Analysis," AMSE Working Papers 1359, Aix-Marseille School of Economics, Marseille, France, revised 18 Dec 2013.

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