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Countercyclical risk aversion and self-reinforcing feedback loops in experimental asset markets

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  • Anthony Newell
  • Lionel Page

Abstract

We design an asset market experiment in which participants are primed in a boom or bust market condition before trading. We find that pricing bubbles are significantly reduced in the markets in the bust priming condition and that mispricing of assets is larger in the boom condition. We also find that participants exhibit weaker predictive ability in the boom priming condition compared to the bust priming condition. These findings lend weight to the idea that traders’ risk attitude are time varying and that market dynamics may affect these risk attitudes, creating the possibility of feedback loops on market conditions themselves.

Suggested Citation

  • Anthony Newell & Lionel Page, 2017. "Countercyclical risk aversion and self-reinforcing feedback loops in experimental asset markets," QuBE Working Papers 050, QUT Business School.
  • Handle: RePEc:qut:qubewp:wp050
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    File URL: http://external-apps.qut.edu.au/business/documents/QuBEWorkingPapers/2017/CCRA_Paper.pdf
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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 for the Study of Labor (IZA).

    More about this item

    Keywords

    Behavioural finance; countercyclical risk aversion; time-varying risk aversion; feedback loops; financial bubbles.;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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