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On the ingredients for bubble formation: Informed traders and communication

Listed author(s):
  • Oechssler, Jörg
  • Schmidt, Carsten
  • Schnedler, Wendelin

Bubbles in asset markets have been documented in numerous experiments. Most experiments in which bubbles occur feature a declining fundamental value. This feature has been criticized for being atypical of real financial markets. Here, we experimentally study other ingredients for bubble formation that are common in such markets, namely the existence of inside information and communication among traders. We find that bubbles and mirages can occur if these additional ingredients are present. In particular, the mere possibility that some traders are better informed than others can create bubbles. Surprisingly, communication turns out to be counterproductive for bubble formation.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165188911001199
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 11 ()
Pages: 1831-1851

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:11:p:1831-1851
DOI: 10.1016/j.jedc.2011.05.009
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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