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Bubbles in hybrid markets - How expectations about algorithmic trading affect human trading

Author

Listed:
  • Mike Farjam
  • Oliver Kirchkamp

    (School of Economics and Business Administration, Friedrich-Schiller-University Jena)

Abstract

Bubbles are omnipresent in lab experiments with asset markets. But these experiments were (mostly) conducted in environments with only human traders. Today markets are substantially determined by algorithmic traders. Here we use a laboratory experiment to measure human trading behaviour changes if these humans expect algorithmic traders. To disentangle the direct effect algorithmic traders have we use a clean design where we can manipulate only the expectations of human traders. We find clearly smaller bubbles if human traders expect algorithmic traders to be present.

Suggested Citation

  • Mike Farjam & Oliver Kirchkamp, 2015. "Bubbles in hybrid markets - How expectations about algorithmic trading affect human trading," Jena Economic Research Papers 2015-003, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2015-003
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    Cited by:

    1. Butler, David & Cheung, Stephen L., 2018. "Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets," IZA Discussion Papers 11563, Institute of Labor Economics (IZA).
    2. Christoph March, 2019. "The Behavioral Economics of Artificial Intelligence: Lessons from Experiments with Computer Players," CESifo Working Paper Series 7926, CESifo.
    3. Farjam, Mike, 2019. "On whom would I want to depend; humans or computers?," Journal of Economic Psychology, Elsevier, vol. 72(C), pages 219-228.
    4. Owen Powell & Natalia Shestakova, 2017. "Experimental asset markets: behavior and bubbles," Chapters, in: Morris Altman (ed.), Handbook of Behavioural Economics and Smart Decision-Making, chapter 21, pages 375-391, Edward Elgar Publishing.
    5. Hans-Theo Normann & Martin Sternberg, 2021. "Hybrid Collusion: Algorithmic Pricing in Human-Computer Laboratory Markets," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2021_11, Max Planck Institute for Research on Collective Goods.
    6. Das, Sougata & Kadapakkam, Palani-Rajan, 2020. "Machine over Mind? Stock price clustering in the era of algorithmic trading," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Bubbles; Expectations; Experiment; Algorithmic Traders;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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