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

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Author Info
Giulio Bottazzi ()
Giovanna Devetag ()
Francesca Pancotto ()

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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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Publisher Info
Paper provided by Computable 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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Related research
Keywords: Experimental economics; Expectations; Coordination; Volatility; Asset pricing;

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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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