IDEAS home Printed from https://ideas.repec.org/p/ams/ndfwpp/99-07.html
   My bibliography  Save this paper

Expectation Driven Price Volatility in an Experimental Cobweb Economy

Author

Listed:
  • Hommes, C.H.

    (Universiteit van Amsterdam)

  • Sonnemans, J.

    (Universiteit van Amsterdam)

  • Tuinstra, J.

    (Universiteit van Amsterdam)

  • van de Velden, H.

    (Universiteit van Amsterdam)

Abstract

The purpose of this paper is to investigate expectation formation in a controlled experimental environment. Subjects are asked to predict next periods price in an unknown, unstable nonlinear cobweb economy with expectational feedback. Subjects have no information about underlying market equilibrium equations, but can learn by observing past price realizations and predictions. We conduct both single-agent and multi-agent experiments. In the multi-agent experiments forecasting errors were lower and average earnings were higher than in the single-agent experiments. In both the single and multi-agent experiments in most cases convergence in the mean to rational expectations (RE) occurs. Typically, the null hypothesis that the sample mean of realized prices is different from the RE steady state cannot be rejected. However, prices do not converge to the RE steady state but keep fluctuating irregularly. In fact, almost all experiments exhibit strongly significant excess price volatility driven by endogenous expectations.

Suggested Citation

  • Hommes, C.H. & Sonnemans, J. & Tuinstra, J. & van de Velden, H., 1999. "Expectation Driven Price Volatility in an Experimental Cobweb Economy," CeNDEF Working Papers 99-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  • Handle: RePEc:ams:ndfwpp:99-07
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. C. H. Hommes, 2001. "Financial markets as nonlinear adaptive evolutionary systems," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 149-167.
    2. Brock,W.A. & Hommes,C.H., 2001. "Evolutionary dynamics in financial markets with many trader types," Working papers 7, Wisconsin Madison - Social Systems.
    3. Sonnemans, Joep & Hommes, Cars & Tuinstra, Jan & van de Velden, Henk, 2004. "The instability of a heterogeneous cobweb economy: a strategy experiment on expectation formation," Journal of Economic Behavior & Organization, Elsevier, vol. 54(4), pages 453-481, August.
    4. Westerhoff, Frank H., 2003. "Expectations driven distortions in the foreign exchange market," Journal of Economic Behavior & Organization, Elsevier, vol. 51(3), pages 389-412, July.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ams:ndfwpp:99-07. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/cnuvanl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Cees C.G. Diks (email available below). General contact details of provider: https://edirc.repec.org/data/cnuvanl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.