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

Author

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  • 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. Farjam, Mike, 2019. "On whom would I want to depend; humans or computers?," Journal of Economic Psychology, Elsevier, vol. 72(C), pages 219-228.
    2. 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).
    3. 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.
    4. March, Christoph, 2019. "The behavioral economics of artificial intelligence: Lessons from experiments with computer players," BERG Working Paper Series 154, Bamberg University, Bamberg Economic Research Group.
    5. Hans-Theo Normann & Martin Sternberg, 2021. "Human-Algorithm Interaction: Algorithmic Pricing in Hybrid 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, revised 13 Apr 2022.
    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).
    7. Kirchkamp, Oliver & Oechssler, Joerg & Sofianos, Andis, 2021. "The Binary Lottery Procedure does not induce risk neutrality in the Holt & Laury and Eckel & Grossman tasks," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 348-369.

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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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