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Coordination of Expectations in Asset Pricing Experiments

Author

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

Abstract

We investigate expectation formation in a controlled experimental en-vironment. Subjects are asked to predict the price in a standard asset pricingmodel. They do not have knowledge of the underlying market equilibrium equa-tions, but they know all past realized prices and their own predictions. Aggregatedemand of the risky asset depends upon the forecasts of the participants. The real-ized price is then obtained from market equilibrium with feedback from individualexpectations. Each market is populated by six subjects and a small fraction of fun-damentalist traders. Realized prices differ significantly from fundamental values.In some groups the asset price converges slowly to the fundamental price, in othergroups there are regular oscillations around the fundamental price. Participantscoordinate on a common prediction strategy. The individual prediction strategiescan be estimated and correspond, for a large majority of participants, to simplelinear autoregressive forecasting rules.
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Suggested Citation

  • Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2004. "Coordination of Expectations in Asset Pricing Experiments," DNB Staff Reports (discontinued) 119, Netherlands Central Bank.
  • Handle: RePEc:dnb:staffs:119
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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