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Traders’ heterogeneity and bubble-crash patterns in experimental asset markets

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  • Baghestanian, S.
  • Lugovskyy, V.
  • Puzzello, D.

Abstract

We propose a heterogeneous agent model for experimental closed-book call markets with speculators, fundamental and noise traders. We provide structural estimates of the parameters of the model using new experimental data, which allow us to track individual behavior, cognitive reflection abilities, and accuracy of price forecasts. Based on the model's predictions for individual behavior we identify different types of traders in the data. We find that fundamental traders and speculators have higher terminal wealth and perform better on a cognitive reflection test and price forecasting than noise traders. More importantly, we find that all three types of traders are important to understand the mechanics of bubbles and crashes. In the initial period, fundamental traders buy from noise traders. Next, speculators buy from fundamental traders during the boom. Finally, speculators generate the crash by selling to noise traders. Our model predicts smaller bubbles if the cash and asset endowments are higher, keeping the cash-to-asset ratio constant. Our theory has predictive power as we confirm this prediction with additional out-of-sample data.

Suggested Citation

  • Baghestanian, S. & Lugovskyy, V. & Puzzello, D., 2015. "Traders’ heterogeneity and bubble-crash patterns in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 82-101.
  • Handle: RePEc:eee:jeborg:v:117:y:2015:i:c:p:82-101
    DOI: 10.1016/j.jebo.2015.06.007
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    Cited by:

    1. Praveen Kujal & Owen Powell, 2017. "Bubbles in Experimental Asset Markets," Working Papers 17-01, Chapman University, Economic Science Institute.
    2. Dickinson, David L. & Chaudhuri, Ananish & Greenaway-McGrevy, Ryan, 2017. "Trading While Sleepy? Circadian Mismatch and Excess Volatility in a Global Experimental Asset Market," IZA Discussion Papers 10984, Institute for the Study of Labor (IZA).

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