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Individual speculative behavior and overpricing in experimental asset markets

Author

Listed:
  • Dirk-Jan Janssen

    (Radboud University)

  • Sascha Füllbrunn

    (Radboud University)

  • Utz Weitzel

    (Radboud University
    Utrecht University)

Abstract

A rich history of theoretical models in finance shows that speculation can lead to overpricing and price bubbles. We provide evidence that, indeed, individual speculative behavior fuels overpricing in (experimental) asset markets. In a first step, we elicit individual speculative behavior in a one-shot setting with a novel speculation elicitation task (SET). In a second step, we use this measure of speculative behavior to compose dynamic, continuous double auction markets in line with Smith et al. (Econometrica 56(5):1119–1151, 1988). We find significant higher overpricing in markets with traders who exhibited more speculative behavior in the individual SET. However, we find no such differences in overpricing when we test for alternative explanations, using a market environment introduced by Lei, Noussair, and Plott (Econometrica 69(4):831–859, 2001) where speculation is impossible. Taken together, our results corroborate the notion that speculation is an important factor in overpricing and bubble formation if market environments allow for the pursuit of capital gains.

Suggested Citation

  • Dirk-Jan Janssen & Sascha Füllbrunn & Utz Weitzel, 2019. "Individual speculative behavior and overpricing in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 22(3), pages 653-675, September.
  • Handle: RePEc:kap:expeco:v:22:y:2019:i:3:d:10.1007_s10683-018-9565-4
    DOI: 10.1007/s10683-018-9565-4
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    Cited by:

    1. Shinichi Hirota & Juergen Huber & Thomas Stock & Shyam Sunder, 2018. "Speculation and Price Indeterminacy in Financial Markets: An Experimental Study," Cowles Foundation Discussion Papers 2134R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2020.
    2. Bao, Te & Ma, Mengzhong & Wen, Yonggang, 2023. "Herding in the non-fungible token (NFT) market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    3. Steven Tucker & Yilong Xu, 2024. "Motivations to speculate are the driving forces in experimental asset market bubbles," Working Papers in Economics 24/02, University of Waikato.
    4. Sascha Füllbrunn & Tibor Neugebauer & Andreas Nicklisch, 2020. "Underpricing of initial public offerings in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 23(4), pages 1002-1029, December.
    5. Steven Tucker & Yilong Xu, 2024. "Nonspeculative Bubbles Revisited," Working Papers in Economics 24/01, University of Waikato.
    6. Penalver, Adrian & Hanaki, Nobuyuki & Akiyama, Eizo & Funaki, Yukihiko & Ishikawa, Ryuichiro, 2020. "A quantitative easing experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    7. Hirota, Shinichi & Huber, Juergen & Stöckl, Thomas & Sunder, Shyam, 2022. "Speculation, money supply and price indeterminacy in financial markets: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1275-1296.
    8. repec:jdm:journl:v:17:y:2022:i:4:p:883-936 is not listed on IDEAS
    9. Steven Tucker & Yilong Xu, 2020. "Nonspeculative Bubbles Revisited: Speculation Does Matter," Working Papers in Economics 20/09, University of Waikato.
    10. Peter Katuščák & Tomáš Miklánek, 2023. "What drives conditional cooperation in public good games?," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 435-467, April.
    11. repec:cup:judgdm:v:17:y:2022:i:4:p:883-936 is not listed on IDEAS
    12. Kiss, Hubert J. & Kóczy, László Á. & Pintér, Ágnes & Sziklai, Balázs R., 2022. "Does risk sorting explain overpricing in experimental asset markets?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 99(C).
    13. Nicolas Cofre & Magdalena Mosionek-Schweda, 2023. "A simulated electronic market with speculative behaviour and bubble formation," Papers 2311.12247, arXiv.org.
    14. Füllbrunn, Sascha & Neugebauer, Tibor, 2022. "Testing market regulations in experimental asset markets – The case of margin purchases," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1160-1183.
    15. Tomislav Globan & Tihana Skrinjaric, 2020. "Penny wise and pound foolish: capital gains tax and trading volume on the Zagreb Stock Exchange," Public Sector Economics, Institute of Public Finance, vol. 44(3), pages 299-329.

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    More about this item

    Keywords

    Speculation; Experimental asset markets; Financial economics;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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