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Bubbles and Crashes Revisited

Author

Listed:
  • Dean Johnson

    () (Michigan Technological University)

  • Patrick Joyce

    () (Michigan Technological University)

Abstract

Based on the pioneering work of Smith, Suchanek, & Williams (1988) experimental researchers have concluded that assets markets are prone to bubbles and crashes in experimental settings. Numerous authors employing the SSW framework have incorporated features designed to reduce or eliminate the observed bubbles (e.g., circuit breakers, short selling, long-lived assets) with little success. This paper alters the underlying process determining the asset's fundamental value by incorporating a new experimental design feature. Its results indicate that asset prices and fundamental value can indeed deviate per SSW?s original results, but the popular interpretation that markets will persistently bubble and crash is misconstrued. Indeed, it appears that rapidly decreasing fundamental values contribute to the bubble. In markets with slowly decreasing, constant or increasing fundamental values, bubbles and crashes are much less common, appearing when the asset price significantly deviates from fundamental value at the onset of the experiment. These interpretations hold in presence or absence of circuit breakers in the market.

Suggested Citation

  • Dean Johnson & Patrick Joyce, 2012. "Bubbles and Crashes Revisited," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 29-42, August.
  • Handle: RePEc:bap:journl:120303
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    References listed on IDEAS

    as
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    Cited by:

    1. Ron Wallace, 2017. "The Signature of Risk: Agent-based Models, Boolean Networks and Economic Vulnerability," Economic Thought, World Economics Association, vol. 6(1), pages 1-15, March.
    2. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2015. "Multi-period experimental asset markets with distinct fundamental value regimes," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 314-334, June.

    More about this item

    Keywords

    Bubbles; Crashes; Experimental asset markets;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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