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Bubbles and information: An experiment

  • Matthias Sutter

    ()

  • J?rgen Huber

    ()

  • Michael Kirchler

    ()

We study whether information about imminent future dividends can abate bubbles in experimental asset markets. Using the seminal design of Smith et al. (1988) we find that markets where traders are asymmetrically informed about future dividends have smaller, and shorter, bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices ? implying higher market efficiency ? when some traders know more than others about the future prospects of an asset. We also find that asymmetric information has a similar abating impact on bubbles as when uninformed traders accumulate experience, though for different reasons.

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File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2008-20.pdf
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Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2008-20.

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Length: 53
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:inn:wpaper:2008-20
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  1. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
  2. 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, 06.
  3. Plott, Charles R. & Sunder, Shyam., . "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational Expectations Models," Working Papers 331, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  5. 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.
  6. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2010. "Bubble measures in experimental asset markets," Experimental Economics, Springer, vol. 13(3), pages 284-298, September.
  7. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
  8. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  9. Charles R. Schnitzlein, 2002. "Price Formation and Market Quality When the Number and Presence of Insiders Is Unknown," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1077-1109.
  10. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
  11. Ernan Haruvy & Yaron Lahav & Charles N. Noussair, 2007. "Traders' Expectations in Asset Markets: Experimental Evidence," American Economic Review, American Economic Association, vol. 97(5), pages 1901-1920, December.
  12. 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.
  13. 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 509-41, October.
  14. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  15. 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, 06.
  16. Charles Noussair & Stephane Robin & Bernard Ruffieux, 2001. "Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values," Experimental Economics, Springer, vol. 4(1), pages 87-105, June.
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