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Coordination of Expectations in Asset Pricing Experiments

  • Cars Hommes
  • Joep Sonnemans
  • Jan Tuinstra
  • Henk van de Velden

We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand for the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from six individual expectations. Realized prices differ significantly from fundamental values and typically exhibit oscillations around, or slow convergence to, this fundamental. In all groups participants coordinate on a common prediction strategy. Copyright 2005, Oxford University Press.

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Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 119.

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Date of creation: Jul 2004
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Handle: RePEc:dnb:staffs:119
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