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Price Dynamics and Consumption Smoothing in Experimental Asset Markets

Author

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  • Halim, Edward
  • Riyanto, Yohanes Eko
  • Roy, Nilanjan

Abstract

We report the results of an experiment designed to study the determinants of asset price movement and consumption smoothing behavior across asset markets populated with varying proportion of traders with and without having induced motive to smooth consumption. Although the asset is over-priced compared to the risk-neutral fundamental value in all sessions, the extent of over-pricing and magnitude of price movement is significantly higher when traders with no induced motive to trade are present. We also find that the price of the asset co-moves with the dividend state, with price predictability being higher in the presence of traders with induced motive to smooth consumption. Participants motivated to minimize consumption fluctuations are able to do so with the inclination being more for those having lower initial endowment. With fixed prices, traders are able to smooth consumption not only over periods but also over the dividend states.

Suggested Citation

  • Halim, Edward & Riyanto, Yohanes Eko & Roy, Nilanjan, 2016. "Price Dynamics and Consumption Smoothing in Experimental Asset Markets," MPRA Paper 71631, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:71631
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    More about this item

    Keywords

    Asset Markets; Uncertainty; Experimental Economics; Price Predictability; Consumption Smoothing;
    All these keywords.

    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
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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