Bubble or no Bubble - The Impact of Market Model on the Formation of Price Bubbles in Experimental Asset Markets
AbstractFor the past two decades a market model introduced by Smith, Suchanek, and Williams (1988, henceforth SSW) has dominated experimental research on financial markets. In SSW the fundamental value of the traded asset is determined by the expected value of a finite stream of dividend payments. This setup implies a deterministically falling fundamental value with a predetermined end of the life-span of the asset and extremely high dividend-payouts. We present a new market model in which we implement the fundamental value by adopting a random walk process. Compared to SSW-markets, prices in the new markets (SAVE) are more efficient and end-of-experiment imbalances common in SSW-markets are not observed. Our results demonstrate, that implicit features of the SSW market model contribute to bubble formation.
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Bibliographic InfoPaper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2009-26.
Date of creation: Jun 2009
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Experimental economics; asset market; bubble; market efficiency;
Find related papers by JEL classification:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-14 (All new papers)
- NEP-EXP-2009-11-14 (Experimental Economics)
- NEP-MIC-2009-11-14 (Microeconomics)
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- Cheung, Stephen L. & Coleman, Andrew, 2011.
"League-Table Incentives and Price Bubbles in Experimental Asset Markets,"
IZA Discussion Papers
5704, Institute for the Study of Labor (IZA).
- Cheung, Stephen L. & Coleman, Andrew, 2012. "League-Table Incentives and Price Bubbles in Experimental Asset Market s," Working Papers 2012-13, University of Sydney, School of Economics.
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