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An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Pricing Mechanism

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Abstract

We report the results of an experiment designed to study the role of institutional structure in the formation of bubbles and crashes in laboratory asset markets. In a setting employing double auctions and call markets as trading institutions, bubbles and crashes are a quite robust phenomenon. The only factor appearing to reduce bubbles is experience across markets. In this study, we employ the tâtonnement trading institution, which has not been previously explored in laboratory asset markets. The results show that bubbles are eliminated, suggesting that the trading institution plays a crucial role in the formation of bubbles.

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  • Volodymyr Lugovskyy & Daniela Puzzello & Steven Tucker, 2009. "An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Pricing Mechanism," Working Papers in Economics 09/19, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:09/19
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    Cited by:

    1. Federico Bonetto & Vinod Cheriyan & Anton J. Kleywegt, 2017. "Models of Investor Forecasting Behavior — Experimental Evidence," JRFM, MDPI, vol. 11(1), pages 1-41, December.
    2. Breaban, A.G. & Noussair, C.N., 2014. "Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment," Discussion Paper 2014-010, Tilburg University, Center for Economic Research.
    3. John Duffy & Sean Crockett, 2010. "An Experimental Test of the Lucas Asset Pricing Model," Working Paper 504, Department of Economics, University of Pittsburgh, revised May 2013.
    4. Breaban, A.G., 2014. "Behavior and asset markets : Individual decisions, emotions and fundamental value trajectories," Other publications TiSEM a20e6a40-f15e-4331-83cb-c, Tilburg University, School of Economics and Management.
    5. Crockett, Sean & Friedman, Daniel & Oprea, Ryan, 2017. "Aggregation and convergence in experimental general equilibrium economies constructed from naturally occurring preferences," Discussion Papers, Research Professorship Market Design: Theory and Pragmatics SP II 2017-501, WZB Berlin Social Science Center.

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    More about this item

    Keywords

    Bubbles; Trading Institutions; Pricing Mechanisms; Tâtonnement;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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