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Coordination of Expectations in Asset Pricing Experiments

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Author Info
Cars Hommes () (CeNDEF, Faculty of Economics and Econometrics, University of Amsterdam)
Joep Sonnemans () (CeNDEF, Faculty of Economics and Econometrics, University of Amsterdam)
Jan Tuinstra () (CeNDEF, Faculty of Economics and Econometrics, University of Amsterdam)
Henk van de Velden () (CeNDEF, Faculty of Economics and Econometrics, University of Amsterdam)

Additional information is available for the following registered author(s):

Abstract

We investigate expectation formation in a controlled experimental en- vironment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equa- tions, 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 real- ized price is then obtained from market equilibrium with feedback from individual expectations. Each market is populated by six subjects and a small fraction of fun- damentalist 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. 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 Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-010/1.

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Date of creation: 23 Jan 2003
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Handle: RePEc:dgr:uvatin:20030010

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Related research
Keywords: experimental economics expectations asset pricing coordination.

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
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. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August. [Downloadable!] (restricted)
  2. Harrison Hong & Jeremy C. Stein, 2003. "Simple Forecasts and Paradigm Shifts," NBER Working Papers 10013, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Marimon, Ramon & Sunder, Shyam, 1994. "Expectations and Learning under Alternative Monetary Regimes: An Experimental Approach," Economic Theory, Springer, vol. 4(1), pages 131-62, January.
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  4. Cars H. Hommes, 2001. "Financial Markets as Nonlinear Adaptive Evolutionary Systems," Tinbergen Institute Discussion Papers 01-014/1, Tinbergen Institute. [Downloadable!]
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  5. Bloomfield, Robert, 1996. " Quotes, Prices, and Estimates in a Laboratory Market," Journal of Finance, American Finance Association, vol. 51(5), pages 1791-1808, December. [Downloadable!] (restricted)
  6. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December. [Downloadable!] (restricted)
  7. Dwyer, Gerald P, Jr, et al, 1993. "Tests of Rational Expectations in a Stark Setting," Economic Journal, Royal Economic Society, vol. 103(418), pages 586-601, May. [Downloadable!] (restricted)
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  8. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  9. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(1), pages 1-27.
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  10. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May. [Downloadable!] (restricted)
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  11. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08. [Downloadable!] (restricted)
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  12. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-107, September. [Downloadable!] (restricted)
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  13. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October. [Downloadable!] (restricted)
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  14. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March. [Downloadable!] (restricted)
  15. Williams, Arlington W, 1987. "The Formation of Price Forecasts in Experimental Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 1-18, February. [Downloadable!] (restricted)
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  17. Harrison Hong & Jeremy C. Stein, 2003. "Simple Forecasts and Paradigm Shifts," Harvard Institute of Economic Research Working Papers 2007, Harvard - Institute of Economic Research. [Downloadable!]
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Full references

Cited by:
(explanations, 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. Gunduz Caginalp & Vladimira Ilieva, 2006. "The dynamics of trader motivations in asset bubbles," Labsi Experimental Economics Laboratory University of Siena 008, University of Siena. [Downloadable!]
  2. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2003. "Bifurcation Routes to Volatility Clustering under Evolutionary Learning," CeNDEF Working Papers 03-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  3. Cars Hommes, 2006. "Interacting Agents in Finance," Tinbergen Institute Discussion Papers 06-029/1, Tinbergen Institute. [Downloadable!]
  4. Giulio Bottazzi & Giovanna Devetag, 2005. "Expectations structure in asset pricing experiments," CEEL Working Papers 0503, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
    Other versions:
  5. Heemeijer, P. & Hommes, C.H. & Sonnemans, J. & Tuinstra, J., 2006. "Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation," CeNDEF Working Papers 06-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  6. 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!]
  7. Giulio Bottazzi & Giovanna Devetag & Francesca Pancotto, 2008. "Does Variance matter? Expectations of price return and variability in an asset pricing experiment," CEEL Working Papers 0801, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
  8. Hommes, C.H., 2006. "Interacting agents in finance, entry written for the New Palgrave Dictionary of Economics, Second Edition, edited by L. Blume and S. Durlauf, Palgrave Macmillan, forthcoming 2006," CeNDEF Working Papers 06-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  9. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Papers 334, University of Pittsburgh, Department of Economics, revised Mar 2008. [Downloadable!]
  10. Hommes, C.H. & Sonnemans, J. & Tuinstra, J. & Velden, H. van de, 2002. "Learning in Coweb Experiments," CeNDEF Working Papers 02-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
    Other versions:
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