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Trading Institutions in Experimental Asset Markets: Theory and Evidence

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Abstract

We report the results of an experiment designed to study the role of trading institutions in the formation of bubbles and crashes in laboratory asset markets. We employ three trading institutions: Call Market, Double Auction and Tâtonnement. The results show that bubbles are significantly smaller in uniform-price institutions than in Double Auction. We reproduce this and other critical patterns of the data by calibrating a heterogeneous agent model with fundamental and myopic-noise traders. The model produces larger bubbles under Double Auction because multiple trades occur within a period, amplifying the impact of myopic traders with positive bias on transaction prices.

Suggested Citation

  • Bulent Guler & Volodymyr Lugovskyy & Daniela Puzzello & Steven Tucker, 2021. "Trading Institutions in Experimental Asset Markets: Theory and Evidence," Working Papers in Economics 21/15, University of Waikato.
    • Handle: RePEc:wai:econwp:21/15
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    File URL: https://repec.its.waikato.ac.nz/wai/econwp/2115.pdf
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    More about this item

    Keywords

    experimental asset markets; bubbles; traders' heterogeneity; trading institutions;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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