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Who inflates the bubble? Forecasters and traders in experimental asset markets

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  • Giamattei, Marcus
  • Huber, Jürgen
  • Lambsdorff, Johann Graf
  • Nicklisch, Andreas
  • Palan, Stefan

Abstract

We use a laboratory experiment to study how forecasting contributes to mispricing. In the Baseline, we assign both the task of forecasting and the task of trading to the same subject. In treatment SamePay, we separate these tasks and assign them to two different subjects, who share the profits from trade. In treatment Accuracy, we pay forecasters according to the accuracy of their forecasts. We find that the separation of tasks induces some mispricing. Even worse, paying for accuracy reduces attention towards the fundamental value and generates major and persistent mispricing as well as trend extrapolation. We infer that it can be risky to incentivize only forecasting accuracy and not give forecasters the right “skin in the game”. Our findings are informative for tracing the sources of mispricing as well as for enhancing financial stability.

Suggested Citation

  • Giamattei, Marcus & Huber, Jürgen & Lambsdorff, Johann Graf & Nicklisch, Andreas & Palan, Stefan, 2020. "Who inflates the bubble? Forecasters and traders in experimental asset markets," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
  • Handle: RePEc:eee:dyncon:v:110:y:2020:i:c:s0165188919301113
    DOI: 10.1016/j.jedc.2019.07.004
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    References listed on IDEAS

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    1. Steiger, Sören & Pelster, Matthias, 2020. "Social interactions and asset pricing bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 503-522.

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    More about this item

    Keywords

    Market efficiency; Analysts; Traders; Division of labor; Mispricing;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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