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Bubbles in Hybrid Markets - How Expectations about Algorithmic Trading Affect Human Trading

Author

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  • Mike Farjam
  • Oliver Kirchkamp

Abstract

Bubbles are omnipresent in lab experiments with asset markets. Most of these experiments were conducted in environments with only human traders. Today markets are substantially determined by algorithmic traders. Here we use a laboratory experiment to measure changes of human trading behavior if these humans expect algorithmic traders. To disentangle the direct effect of algorithmic traders we use a design where we manipulate only the expectations of human traders. We find clearly smaller bubbles if human traders expect algorithmic traders to be present.

Suggested Citation

  • Mike Farjam & Oliver Kirchkamp, 2015. "Bubbles in Hybrid Markets - How Expectations about Algorithmic Trading Affect Human Trading," CESifo Working Paper Series 5631, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5631
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    References listed on IDEAS

    as
    1. Michailova, Julija, 2010. "Overconfidence, risk aversion and (economic) behavior of individual traders in experimental asset markets," MPRA Paper 26390, University Library of Munich, Germany.
    2. Breaban, A. & Noussair, C.N., 2013. "Emotional state and Market Behavior," Discussion Paper 2013-031, Tilburg University, Center for Economic Research.
    3. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2013. "It is Not Just Confusion! Strategic Uncertainty in an Experimental Asset Market," AMSE Working Papers 1340, Aix-Marseille School of Economics, Marseille, France, revised 08 Aug 2013.
    4. Michailova, Julija, 2010. "Overconfidence and bubbles in experimental asset markets," MPRA Paper 26388, University Library of Munich, Germany.
    5. Cheung, Stephen L. & Hedegaard, Morten & Palan, Stefan, 2014. "To see is to believe: Common expectations in experimental asset markets," European Economic Review, Elsevier, vol. 66(C), pages 84-96.
    6. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 261-292.
    7. Andrei A. Kirilenko & Andrew W. Lo, 2013. "Moore's Law versus Murphy's Law: Algorithmic Trading and Its Discontents," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 51-72, Spring.
    8. Stéphane Robin & Katerina Straznicka & Marie Claire Villeval, 2012. "Bubbles and Incentives : An Experiment on Asset Markets," Working Papers halshs-00768434, HAL.
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    10. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2011. "On the ingredients for bubble formation: Informed traders and communication," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1831-1851.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bubbles; expectations; experiment; algorithmic traders;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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