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Asset Price Bubbles and Crashes with Near-Zero-Intelligence Traders: Towards an Understanding of Laboratory Findings

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Author Info

  • John Duffy

    (University of Pittsburgh)

  • M. Utku Unver

    (Harvard University and Koc University)

Abstract

We examine whether a simple agent--based model can generate asset price bubbles and crashes of the type observed in a series of laboratory asset market experiments beginning with the work of Smith, Suchanek and Williams (1988). We follow the methodology of Gode and Sunder (1993, 1997) and examine the outcomes that obtain when populations of zero-- intelligence (ZI) budget constrained, artificial agents are placed in the various laboratory market environments that have given rise to price bubbles. We have to put more structure on the behavior of the ZI-agents in order to address features of the laboratory asset bubble environment. We show that our model of "near--zero--intelligence" traders, operating in the same double auction environments used in several different laboratory studies, generates asset price bubbles and crashes comparable to those observed in laboratory experiments and can also match other, more subtle features of the experimental data.

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Bibliographic Info

Paper provided by EconWPA in its series Computational Economics with number 0307001.

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Date of creation: 01 Jul 2003
Date of revision: 17 Mar 2004
Handle: RePEc:wpa:wuwpco:0307001

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  1. Gode, Dhananjay K & Sunder, Shyam, 1997. "What Makes Markets Allocationally Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 603-30, May.
  2. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  3. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
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  7. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
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  9. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 68(4), pages 509-41, October.
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  14. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185.
  15. Charles Noussair & Stephane Robin & Bernard Ruffieux, 2001. "Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values," Experimental Economics, Springer, vol. 4(1), pages 87-105, June.
  16. Leigh Tesfatsion, 2002. "Agent-Based Computational Economics," Computational Economics 0203001, EconWPA, revised 15 Aug 2002.
  17. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
  18. Noussair, C. & Robin, S. & Ruffieux, B., 1998. "Bubbles and Anti-Crashes in Laboratory Asset Markets with Constant Fundamental Values," Purdue University Economics Working Papers 1119, Purdue University, Department of Economics.
  19. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
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