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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/pii/S0167-2681(07)00035-2
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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
    Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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    1. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
    2. David Porter & Vernon Smith, 1994. "Stock market bubbles in the laboratory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(2), pages 111-128.
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    6. Sonnemans, J. & Hommes, C.H. & Tuinstra, J. & van de Velden, H., 1999. "The Instability of a Heterogeneous Cobweb economy: a Strategy Experiment on Expectation Formation," CeNDEF Working Papers 99-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    7. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
    8. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2003. "Coordination of Expectations in Asset Pricing Experiments," Tinbergen Institute Discussion Papers 03-010/1, Tinbergen Institute.
    9. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
    10. Robert Vigfusson, 1996. "Switching Between Chartists and Fundamentalists: A Markov Regime-Switching Approach," International Finance 9602003, EconWPA.
    11. Lei, V. & Noussair, C. & Plott, C.R., 1998. "Non-Speculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality," Purdue University Economics Working Papers 1120, Purdue University, Department of Economics.
    12. J. Doyne Farmer & Shareen Joshi, 2000. "The Price Dynamics of Common Trading Strategies," Working Papers 00-12-069, Santa Fe Institute.
    13. 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.
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