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The "Inflow-Effect" - Trader Inflow and Bubble Formation in Asset Markets

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  • Michael Kirchler
  • Caroline Bonn
  • Jürgen Huber
  • Michael Razen

Abstract

We investigate the impact of trader and cash inflow on bubble formation in asset markets with a novel design featuring heterogeneous information and a constant fundamental value. Implementing seven treatments we find that (i) only the joint inflow of traders and cash triggers bubbles ("inflow-effect"). (ii) In treatments with trader and cash inflow only in the first half of the market, prices converge to fundamentals towards maturity of the asset. This inflow-effect is very robust as we observe bubbles in almost all of the 24 markets with trader inflow. The analysis of traders' beliefs reveals that (iii) despite fundamentals staying constant, beliefs about fundamentals co-move with upwardly trending prices. Finally, we report a speculative motive only among the optimists in treatments where we observe bubbles.

Suggested Citation

  • Michael Kirchler & Caroline Bonn & Jürgen Huber & Michael Razen, 2014. "The "Inflow-Effect" - Trader Inflow and Bubble Formation in Asset Markets," Working Papers 2014-22, Faculty of Economics and Statistics, Universität Innsbruck.
    • Handle: RePEc:inn:wpaper:2014-22
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    References listed on IDEAS

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    1. Gill, David & Prowse, Victoria, 2019. "Measuring costly effort using the slider task," Journal of Behavioral and Experimental Finance, Elsevier, vol. 21(C), pages 1-9.
    2. Owen Powell & Natalia Shestakova, 2017. "Experimental asset markets: behavior and bubbles," Chapters, in: Morris Altman (ed.), Handbook of Behavioural Economics and Smart Decision-Making, chapter 21, pages 375-391, Edward Elgar Publishing.

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    More about this item

    Keywords

    Experimental finance; inflow-effect; trader inflow; asset market; bubble; market efficiency;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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