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On the ingredients for bubble formation: Informed traders and communication

Author

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  • Oechssler, Jörg
  • Schmidt, Carsten
  • Schnedler, Wendelin

Abstract

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.

Suggested Citation

  • Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2011. "On the ingredients for bubble formation: Informed traders and communication," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1831-1851.
    • Handle: RePEc:eee:dyncon:v:35:y:2011:i:11:p:1831-1851
    DOI: 10.1016/j.jedc.2011.05.009
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    More about this item

    Keywords

    Asset markets; Bubbles; Experiment; Mirages; Dividends;
    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
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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