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On Booms That Never Bust: Ambiguity in Experimental Asset Markets with Bubbles

Author

Listed:
  • Brice Corgnet

    (Univ. Lyon, EM Lyon, GATE UMR 5824, F-69130 Ecully, France)

  • Roberto Hernán-González

    (Univ. Bourgogne Franche Comté, Burgundy School of Business-CEREN (EA 7477), 29 rue Sambin, 21000 Dijon, France)

  • Praveen Kujal

    (Department of Economics, Middlesex University Business School, London, U.K.)

Abstract

We study the effect of ambiguity on the formation of bubbles and on the occurrence of crashes in experimental asset markets à la Smith, Suchanek, and Williams (1988). We extend their framework to an environment where the fundamental value of the asset is ambiguous. We show that, when the fundamental value is ambiguous, asset prices tend to be lower than when it is risky although bubbles form in both the ambiguous and the risky environments. Additionally, bubbles do not crash in the ambiguous case whereas they do so in the risky one. These findings regarding depressed prices and the absence of crashes in the presence of ambiguity are in line with recent theoretical work stressing the crucial role of ambiguity to account for surprisingly low equity prices (high returns) as well as herding in asset markets.

Suggested Citation

  • Brice Corgnet & Roberto Hernán-González & Praveen Kujal, 2018. "On Booms That Never Bust: Ambiguity in Experimental Asset Markets with Bubbles," Working Papers 1825, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:1825
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    More about this item

    Keywords

    Experimental asset markets; bubbles; ambiguity;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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