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Expectations and Bubbles in Asset Pricing Experiments

Listed author(s):
  • Hommes, C.H.

    ()

    (Universiteit van Amsterdam)

  • Sonnemans, J.
  • Tuinstra, J.
  • Velden, H. van de

We present results on expectation formation in a controlled experimental environment. In each period subjects are asked to predict the next price of a risky asset. The realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts. In most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously. These bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or “positive feedback expectations” of the participants. We also analyze individual predictions of participants and Þnd that participants within a group tend to coordinate on a common prediction strategy.

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File URL: http://cendef.uva.nl/binaries/content/assets/subsites/amsterdam-school-of-economics/amsterdam-school-of-economics-research-institute/cendef/working-papers-2002/bubbles.pdf?1417180475150
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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 02-05.

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Date of creation: 2002
Handle: RePEc:ams:ndfwpp:02-05
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Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands

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