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Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation

  • Heemeijer, P.

    ()

    (Universiteit van Amsterdam)

  • Hommes, C.H.

    (Universiteit van Amsterdam)

  • Sonnemans, J.

    (Universiteit van Amsterdam)

  • Tuinstra, J.

    (Universiteit van Amsterdam)

The evolution of many economic variables is affected by expectations that economic agents have with respect to the future development of these variables. Here we show, by means of laboratory experiments, that market behavior depends to a large extent on how the realized market price responds to an increase in average price expectations. If it responds by decreasing, as in commodity markets, prices converge quickly to their equilibrium value, confirming the rational expectations hypothesis. If the realized price increases after an increase of average expectations, as is typical for financial markets, large fluctuations in realized prices are likely.

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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 06-05.

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Date of creation: 2006
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Handle: RePEc:ams:ndfwpp:06-05
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