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Coordination of Expectations in Asset Pricing Experiments

Author Info

Listed author(s):
  • Cars Hommes
  • Joep Sonnemans
  • Jan Tuinstra
  • Henk van de Velden

Abstract

We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand for the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from six individual expectations. Realized prices differ significantly from fundamental values and typically exhibit oscillations around, or slow convergence to, this fundamental. In all groups participants coordinate on a common prediction strategy. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhi003
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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 18 (2005)
Issue (Month): 3 ()
Pages: 955-980

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Handle: RePEc:oup:rfinst:v:18:y:2005:i:3:p:955-980
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Find related papers by JEL classification:
  • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
  • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
  • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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