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Bubbles, crashes and information contagion in large-group asset market experiments

Author

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  • Cars Hommes

    (Amsterdam School of Economics, University of Amsterdam
    Tinbergen Institute
    Bank of Canada)

  • Anita Kopányi-Peuker

    (Amsterdam School of Economics, University of Amsterdam
    CPB Netherlands Bureau for Economic Policy Analysis)

  • Joep Sonnemans

    (Amsterdam School of Economics, University of Amsterdam
    Tinbergen Institute)

Abstract

We study the emergence of bubbles in a laboratory experiment with large groups of individuals. The realized price is the aggregation of the forecasts of a group of individuals, with positive expectations feedback through speculative demand. When prices deviate from fundamental value, a random selection of participants receives news about overvaluation. Our findings are: (i) large asset bubbles are robust in large groups, (ii) information contagion through news affects behaviour and may break the coordination on a bubble, (iii) time varying heterogeneity provides an explanation of bubble formation and crashes, and (iv) bubbles are strongly amplified by coordination on trend-extrapolation.

Suggested Citation

  • Cars Hommes & Anita Kopányi-Peuker & Joep Sonnemans, 2021. "Bubbles, crashes and information contagion in large-group asset market experiments," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 414-433, June.
    • Handle: RePEc:kap:expeco:v:24:y:2021:i:2:d:10.1007_s10683-020-09664-w
    DOI: 10.1007/s10683-020-09664-w
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    Cited by:

    1. Bao, Te & Hommes, Cars & Pei, Jiaoying, 2021. "Expectation formation in finance and macroeconomics: A review of new experimental evidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    2. Anufriev, Mikhail & Chernulich, Aleksei & Tuinstra, Jan, 2022. "Asset price volatility and investment horizons: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 19-48.
    3. Chavas, Jean-Paul & Li, Jian & Wang, Linjie, 2024. "Option pricing revisited: The role of price volatility and dynamics," Journal of Commodity Markets, Elsevier, vol. 33(C).
    4. Bao, Te & Corgnet, Brice & Hanaki, Nobuyuki & Riyanto, Yohanes E. & Zhu, Jiahua, 2023. "Predicting the unpredictable: New experimental evidence on forecasting random walks," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    5. Mikhail Anufriev & Frieder Neunhoeffer & Jan Tuinstra, 2024. "Time pressure reduces financial bubbles: Evidence from a forecasting experiment," Working Papers REM 2024/0351, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    6. Myrna Hennequin & Cars Hommes, 2024. "Managing Bubbles in Experimental Asset Markets with Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 429-454, March.
    7. Salle, Isabelle L., 2023. "What to target? Insights from a lab experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 514-533.
    8. Hommes, Cars, 2018. "Behavioral & experimental macroeconomics and policy analysis: a complex systems approach," Working Paper Series 2201, European Central Bank.
    9. Bao, Te & Füllbrunn, Sascha & Pei, Jiaoying & Zong, Jichuan, 2024. "Reading the market? Expectation coordination and theory of mind," Journal of Economic Behavior & Organization, Elsevier, vol. 219(C), pages 510-527.
    10. Nobuyuki Hanaki & Cars Hommes & Dávid Kopányi & Anita Kopányi-Peuker & Jan Tuinstra, 2023. "Forecasting returns instead of prices exacerbates financial bubbles," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 1185-1213, November.
    11. Weimann, Joachim & Brosig-Koch, Jeannette & Heinrich, Timo & Hennig-Schmidt, Heike & Keser, Claudia, 2022. "CO2 Emission reduction – Real public good provision by large groups in the laboratory," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1076-1089.
    12. Bazzana, Davide & Colturato, Michele & Savona, Roberto, 2023. "Learning about unprecedented events: Agent-based modelling and the stock market impact of COVID-19," Finance Research Letters, Elsevier, vol. 56(C).
    13. Yi, Zhen & Zhu, Chao & Zhang, Yuwei, 2024. "Why risk attitude differs between macro and micro level? A decoherence perspective," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 978-997.
    14. Antonio Doria, Francisco, 2011. "J.B. Rosser Jr. , Handbook of Research on Complexity, Edward Elgar, Cheltenham, UK--Northampton, MA, USA (2009) 436 + viii pp., index, ISBN 978 1 84542 089 5 (cased)," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1-2), pages 196-204, April.
    15. Chavas, Jean-Paul & Li, Jian & Wang, Linjie, 2024. "Option Pricing Revisited: The Role of Price Volatility and Dynamics," 2024 Annual Meeting, July 28-30, New Orleans, LA 343544, Agricultural and Applied Economics Association.

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    More about this item

    Keywords

    Experimental finance; Expectation formation; Learning to forecast; Financial bubbles;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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