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The dynamics of trader motivations in asset bubbles

  • Caginalp, G.
  • Ilieva, V.
Registered author(s):

    Asset market experiments are analyzed by distinguishing participants who are net bidders versus net offerers when the trading price is above fundamental value. We find evidence that the cash supply of the bidders diminishes and the cash supply of the offerers increases as the bubble forms. This suggests that the bubble is fueled by the cash of the momentum players and the reversal is caused by inadequate cash in their possession. The experimental data is also analyzed using asset flow difference equations with the result that both bidders are strongly influenced and offerers (surprisingly) are moderately influenced by price trend.

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    File URL: http://www.sciencedirect.com/science/article/B6V8F-4MYMFP3-2/1/4abd34f9f0edfc4048285cc1ed2eaedb
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    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 66 (2008)
    Issue (Month): 3-4 (June)
    Pages: 641-656

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    Handle: RePEc:eee:jeborg:v:66:y:2008:i:3-4:p:641-656
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    1. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
    2. Westerhoff, Frank H., 2004. "Multiasset Market Dynamics," Macroeconomic Dynamics, Cambridge University Press, vol. 8(05), pages 596-616, November.
    3. Vigfusson, Robert, 1997. "Switching between Chartists and Fundamentalists: A Markov Regime-Switching Approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(4), pages 291-305, October.
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    5. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-59, July.
    6. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2005. "Coordination of Expectations in Asset Pricing Experiments," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 955-980.
    7. J. Doyne Farmer & Shareen Joshi, 2000. "The price dynamics of common trading strategies," Papers cond-mat/0012419, arXiv.org.
    8. Brock, W.A. & Hommes, C.H., 1996. "Hetergeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model," Working papers 9621, Wisconsin Madison - Social Systems.
    9. Reitz, Stefan & Westerhoff, Frank, 2003. "Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists," CFS Working Paper Series 2003/10, Center for Financial Studies (CFS).
    10. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
    11. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
    12. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
    13. David Porter & Vernon Smith, 1994. "Stock market bubbles in the laboratory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(2), pages 111-128.
    14. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
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