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Bubble or no Bubble - The Impact of Market Model on the Formation of Price Bubbles in Experimental Asset Markets

Author

Listed:
  • Michael Kirchler

    ()

  • J?rgen Huber

    ()

  • Thomas St?ckl

    ()

Abstract

For the past two decades a market model introduced by Smith, Suchanek, and Williams (1988, henceforth SSW) has dominated experimental research on financial markets. In SSW the fundamental value of the traded asset is determined by the expected value of a finite stream of dividend payments. This setup implies a deterministically falling fundamental value with a predetermined end of the life-span of the asset and extremely high dividend-payouts. We present a new market model in which we implement the fundamental value by adopting a random walk process. Compared to SSW-markets, prices in the new markets (SAVE) are more efficient and end-of-experiment imbalances common in SSW-markets are not observed. Our results demonstrate, that implicit features of the SSW market model contribute to bubble formation.

Suggested Citation

  • Michael Kirchler & J?rgen Huber & Thomas St?ckl, 2009. "Bubble or no Bubble - The Impact of Market Model on the Formation of Price Bubbles in Experimental Asset Markets," Working Papers 2009-26, Faculty of Economics and Statistics, University of Innsbruck.
  • Handle: RePEc:inn:wpaper:2009-26
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    Citations

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    Cited by:

    1. Cheung, Stephen L. & Coleman, Andrew, 2011. "League-Table Incentives and Price Bubbles in Experimental Asset Markets," IZA Discussion Papers 5704, Institute for the Study of Labor (IZA).
    2. repec:beo:journl:v:62:y:2017:i:214:p:45-86 is not listed on IDEAS
    3. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2010. "Bubble measures in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 13(3), pages 284-298, September.

    More about this item

    Keywords

    Experimental economics; asset market; bubble; market efficiency;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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