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Does Volatility matter? Expectations of price return and variability in an asset pricing experiment

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  • Giulio Bottazzi

    ()

  • Giovanna Devetag

    ()

  • Francesca Pancotto

    ()

Abstract

We present results of an experiment on expectation formation in an asset market. Participants to our experiment must provide forecasts of the stock future return to computerized utility-maximizing investors, and are rewarded according to how well their forecasts perform in the market. In the Baseline treatment participants must forecast the stock return one period ahead; in the Volatility treatment, we also elicit subjective confidence intervals of forecasts, which we take as a measure of perceived volatility. The realized asset price is derived from a Walrasian market equilibrium equation with non-linear feedback from individual forecasts. Our experimental markets exhibit high volatility, fat tails and other properties typical of real financial data. Eliciting confidence intervals for predictions has the effect of reducing price fluctuations and increasing subjects' coordination on a common prediction strategy.

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Bibliographic Info

Paper provided by Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia in its series CEEL Working Papers with number 0801.

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Date of creation: 2008
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Handle: RePEc:trn:utwpce:0801

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Keywords: Experimental economics; Expectations; Coordination; Volatility; Asset pricing;

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Cited by:
  1. Olivier Brandouy & Angelo Corelli & Iryna Veryzhenko & Roger Waldeck, 2012. "A re-examination of the “zero is enough” hypothesis in the emergence of financial stylized facts," Journal of Economic Interaction and Coordination, Springer, vol. 7(2), pages 223-248, October.

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