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Peaks and valleys: Price discovery in experimental asset markets with non-monotonic fundamentals

Author

Listed:
  • Charles N. Noussair
  • Owen Powell

Abstract

Purpose - This paper aims to study how the trajectory of fundamental values affects price discovery in an experimental asset market. Design/methodology/approach - An experiment is conducted with two treatments, in which the time path of fundamentals differs between treatments. In the peak treatment, fundamentals first rise and then fall, while in the valley treatment fundamentals first fall and then recover. The experiment allows market prices to be compared to fundamental values. Findings - Both peak and valley treatments experience bubbles when traders are inexperienced. However, price discovery is more rapid and complete in the peak than in the valley treatment. In the peak treatment, prices track the value, the direction of the trend, and changes in trend, more closely than in the valley treatment. Originality/value - This paper documents the first experimental results regarding pricing behavior in markets with non-monotonic fundamentals. It creates an environment (the valley treatment) in which convergence to close to fundamentals does not occur even with repetition of the market under identical conditions. The results demonstrate that the likelihood that an asset market tracks fundamentals depends on the time path of fundamentals.

Suggested Citation

  • Charles N. Noussair & Owen Powell, 2010. "Peaks and valleys: Price discovery in experimental asset markets with non-monotonic fundamentals," Journal of Economic Studies, Emerald Group Publishing, vol. 37(2), pages 152-180, May.
  • Handle: RePEc:eme:jespps:v:37:y:2010:i:2:p:152-180
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    Citations

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    Cited by:

    1. repec:eee:intfor:v:33:y:2017:i:4:p:988-1006 is not listed on IDEAS
    2. Giusti, Giovanni & Jiang, Janet Hua & Xu, Yiping, 2012. "Eliminating Laboratory Asset Bubbles by Paying Interest on Cash," MPRA Paper 37321, University Library of Munich, Germany.
    3. repec:eee:beexfi:v:13:y:2017:i:c:p:42-50 is not listed on IDEAS
    4. Bao, Te & Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan, 2012. "Individual expectations, limited rationality and aggregate outcomes," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1101-1120.
    5. Breaban, A.G. & Noussair, C.N., 2014. "Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment," Discussion Paper 2014-010, Tilburg University, Center for Economic Research.
    6. Nuzzo, Simone & Morone, Andrea, 2017. "Asset markets in the lab: A literature review," Journal of Behavioral and Experimental Finance, Elsevier, vol. 13(C), pages 42-50.
    7. repec:eme:rexezz:s0193-230620140000017002 is not listed on IDEAS
    8. Breaban, A. & Noussair, C.N., 2013. "Emotional state and Market Behavior," Discussion Paper 2013-031, Tilburg University, Center for Economic Research.
    9. Giovanni Giusti & Janet Hua Jiang & Yiping Xu, 2014. "Interest on Cash, Fundamental Value Process and Bubble Formation on Experimental Asset Markets," Staff Working Papers 14-18, Bank of Canada.
    10. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics,in: Experiments in Macroeconomics, volume 17, pages 11-70 Emerald Publishing Ltd.
    11. Cary Deck & David Porter & Vernon L. Smith, 2011. "Double Bubbles in Assets Markets with Multiple Generations," Working Papers 11-10, Chapman University, Economic Science Institute.
    12. Charles N. Noussair & Steven Tucker, 2016. "Cash Inflows And Bubbles In Asset Markets With Constant Fundamental Values," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1596-1606, July.
    13. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2015. "Multi-period experimental asset markets with distinct fundamental value regimes," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 314-334, June.
    14. Breaban, A.G., 2014. "Behavior and asset markets : Individual decisions, emotions and fundamental value trajectories," Other publications TiSEM a20e6a40-f15e-4331-83cb-c, Tilburg University, School of Economics and Management.
    15. Matthias Weber & John Duffy & Arthur Schram, 2016. "An Experimental Study of Bond Market Pricing," Tinbergen Institute Discussion Papers 16-059/I, Tinbergen Institute.
    16. da Gama Batista, João & Massaro, Domenico & Bouchaud, Jean-Philippe & Challet, Damien & Hommes, Cars, 2017. "Do investors trade too much? A laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 18-34.
    17. Owen Powell & Natalia Shestakova, 2017. "The robustness of mispricing results in experimental asset markets," Vienna Economics Papers 1702, University of Vienna, Department of Economics.
    18. Stefan Palan, 2013. "A Review of Research into Smith, Suchanek and Williams Markets," Working Paper Series, Social and Economic Sciences 2013-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

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