IDEAS home Printed from https://ideas.repec.org/p/chu/wpaper/17-01.html
   My bibliography  Save this paper

Bubbles in Experimental Asset Markets

Author

Listed:
  • Praveen Kujal

    (Middlesex University and Economic Science Institute, Chapman University)

  • Owen Powell

    (Universität Wien)

Abstract

One can define a bubble as a persistent increase in the price of an asset over and above its fundamental value with an abrupt fall in prices when no buyers are available to make purchases. The occurrence of market bubbles has a long history, starting with the Dutch Tulip Mania (1624-1637) to the South Sea and Mississippi Bubble (1716-1720), the British Railway Mania (1840´s) to the crash of 1929. Recent events have been the crash of 1987, the dot-com bubble (1990s) to the most recent housing crisis in early 2000. Even though bubbles, and a subsequent crash, may reallocate resources to more efficient activities, the economic costs of bubbles are large and sometimes felt for long periods of time. It is important to emphasize that markets perform an important role in that they aggregate information (Hayek, 1945) for its participants. The aggregation of information occurs through the price discovery process. In the real world markets are seldom efficient and mispricing is common. Due to this, information aggregation seldom happens and consequently one observes deviations of prices from their fundamentals on a regular basis. Market bubbles are an elusive phenomenon and it is due to this that the prior knowledge of the occurrence of a bubble is difficult. In most cases we only know of their occurrence when we observe a crash, but by then it’s too late. Simply stated, bubbles reflect mis-pricing of an asset from its fundamental value. Clearly, knowing the fundamental value in the real world is a challenge. The use of economic experiments is important to study the nature of bubbles for this very reason. Bubbles are hard to detect. The institutional environment is easily controlled in a laboratory setting and one can study the reasons behind the deviation of prices from their fundamental value by carefully varying the experimental parameters. Information that is not easily available in real world settings, such as the fundamental value, is observed and can be controlled in a laboratory setting (declining, constant, ambiguous etc.). Typically, experimental studies on asset market bubbles utilize the continuous Double Auction institution where a participant can be on either side of the market acting as a buyer or seller. This may depend upon the underlying market conditions or their choice of the role based upon their expectations. The good in a typical asset market is durable and lasts till the end of the experiment. For our purpose we will limit ourselves to studies that use perfectly durable goods in asset markets. A good purchased in any period earns a dividend at the end of that period and can be resold at any point of time till the last period and is not perishable. The knowledge of the last period is common to all subjects.

Suggested Citation

  • Praveen Kujal & Owen Powell, 2017. "Bubbles in Experimental Asset Markets," Working Papers 17-01, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:17-01
    as

    Download full text from publisher

    File URL: http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/bubbles-in-experimental-asset-markets-2017.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Adrian Stoian, 2014. "Public Messages and Asset Prices," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 42(4), pages 441-454, December.
    2. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-859, July.
    3. Stephen Cheung & Stefan Palan, 2012. "Two heads are less bubbly than one: team decision-making in an experimental asset market," Experimental Economics, Springer;Economic Science Association, vol. 15(3), pages 373-397, September.
    4. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1731-1737, December.
    5. Brice Corgnet & Roberto Hernán-González & Praveen Kujal & David Porter, 2015. "The Effect of Earned Versus House Money on Price Bubble Formation in Experimental Asset Markets," Review of Finance, European Finance Association, vol. 19(4), pages 1455-1488.
    6. Brice Corgnet & Praveen Kujal & David Porter, 2013. "Reaction to Public Information in Markets: How much does Ambiguity Matter?," Economic Journal, Royal Economic Society, vol. 123(569), pages 699-737, June.
    7. Kirchler, Erich & Maciejovsky, Boris, 2002. "Simultaneous Over- and Underconfidence: Evidence from Experimental Asset Markets," Journal of Risk and Uncertainty, Springer, vol. 25(1), pages 65-85, July.
    8. Mark van Boening & Vernon L. Smith & Charissa P. Wellford, 2000. "Dividend timing and behavior in laboratory asset markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 567-583.
    9. Corgnet, Brice & Kujal, Praveen & Porter, David, 2010. "The effect of reliability, content and timing of public announcements on asset trading behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 254-266, November.
    10. Dmitry Gladyrev & Owen Powell & Natalia Shestakova, 2014. "The Effect of Financial Selection in Experimental Asset Markets," Vienna Economics Papers 1404, University of Vienna, Department of Economics.
    11. repec:eee:beexfi:v:9:y:2016:i:c:p:56-62 is not listed on IDEAS
    12. Palan, Stefan, 2010. "Digital options and efficiency in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 506-522, September.
    13. Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1119-1157, June.
    14. Adriana Breaban & Charles N. Noussair, 2014. "Fundamental value trajectories and trader characteristics in an asset market experiment," Working Papers 2014/08, Economics Department, Universitat Jaume I, Castellón (Spain).
    15. Shaun Hargreaves Heap & Daniel John Zizzo, 2011. "Emotions and chat in a financial markets experiment," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 11-11, School of Economics, University of East Anglia, Norwich, UK..
    16. Owen Powell & Natalia Shestakova, 2017. "The robustness of mispricing results in experimental asset markets," Vienna Economics Papers 1702, University of Vienna, Department of Economics.
    17. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2015. "Erratum to: Multi-period experimental asset markets with distinct fundamental value regimes," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 756-759, December.
    18. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2015. "Multi-period experimental asset markets with distinct fundamental value regimes," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 314-334, June.
    19. Charles Noussair & Steven Tucker, 2006. "Futures Markets And Bubble Formation In Experimental Asset Markets ," Pacific Economic Review, Wiley Blackwell, vol. 11(2), pages 167-184, June.
    20. Kirchler, Michael & Huber, Jürgen & Kleinlercher, Daniel, 2011. "Market microstructure matters when imposing a Tobin tax—Evidence from the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 586-602.
    21. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 68(4), pages 509-541, October.
    22. Williams, Arlington W., 2008. "Price Bubbles in Large Financial Asset Markets," Handbook of Experimental Economics Results, Elsevier.
    23. Michael Kirchler & Jurgen Huber & Thomas Stockl, 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles," American Economic Review, American Economic Association, vol. 102(2), pages 865-883, April.
    24. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185.
    25. Baghestanian, S. & Lugovskyy, V. & Puzzello, D., 2015. "Traders’ heterogeneity and bubble-crash patterns in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 82-101.
    26. Reshmaan N. Hussam & David Porter & Vernon L. Smith, 2008. "Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?," American Economic Review, American Economic Association, vol. 98(3), pages 924-937, June.
    27. 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.
    Full references (including those not matched with items on IDEAS)

    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:chu:wpaper:17-01. 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: (Megan Luetje). General contact details of provider: http://edirc.repec.org/data/esichus.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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

    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.