IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Expectations structure in asset pricing experiments

  • Giulio Bottazzi

    ()

  • Giovanna Devetag

    ()

Notwithstanding the recognized importance of traders’ expectations in characterizing the observed market dynamics, for instance the formation of speculative bubbles and crashes on financial markets, little attention has been devoted so far by economists to a rigorous study of expectation formation in the laboratory. In this work we describe a laboratory experiment on the emergence and coordination of expectations in a pure exchange framework. We largely base our study on previous experiments on expectation formation in a controlled laboratory environment by Cars Hommes, Joep Sonnemans, Ian Tuinstra and Henk van de Velden (2002a). We consider a simple two asset economy with a riskless bond and a risky stock. Each market is composed of six experimental subjects who act as financial advisors of myopic risk-averse utility maximizing investors and are rewarded according to how well their forecasts perform in the market. The participants are asked to predict not only the price of the risky asset at time t+1, as in Hommes et al. (2002a), but also the confidence interval of their prediction, knowing the past realizations of the price until time t ¡ 1. The realized asset price is derived from a Walrasian market equilibrium equation, unknown to the subjects, with feedback from individual forecasts. Subjects’ earnings are proportional to the increase in their wealth level. With respect to previous experiments that did not include an explicit evaluation of risk by participants, we observe a higher price volatility, a decreased likelihood of bubble dynamics and, in general, a higher heterogeneity of predictions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www-ceel.economia.unitn.it/papers/papero05_03.pdf
Download Restriction: no

Paper provided by Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia in its series CEEL Working Papers with number 0503.

as
in new window

Length:
Date of creation: 2005
Date of revision:
Handle: RePEc:trn:utwpce:0503
Contact details of provider: Postal: Via Inama 5, 38100 Trento
Phone: +39-461-882201
Fax: +39-461-882222
Web page: http://www-ceel.economia.unitn.it

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Giulio Bottazzi & Giovanna Devetag, 2003. "Expectations Structure in Asset Pricing Experiments," ROCK Working Papers 022, Department of Computer and Management Sciences, University of Trento, Italy, revised 12 Jun 2008.
  2. Noussair, C. & Robin, S. & Ruffieux, B., 1998. "Bubbles and Anti-Crashes in Laboratory Asset Markets with Constant Fundamental Values," Purdue University Economics Working Papers 1119, Purdue University, Department of Economics.
  3. Mark van Boening & Vernon L. Smith & Charissa P. Wellford, 2000. "Dividend timing and behavior in laboratory asset markets," Economic Theory, Springer, vol. 16(3), pages 567-583.
  4. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2004. "Coordination of Expectations in Asset Pricing Experiments," DNB Staff Reports (discontinued) 119, Netherlands Central Bank.
  5. Giulio Bottazzi, 2002. "A Simple Micro-Model of Market Dynamics Part I: The "Homogenous Agents" Deterministic Limit," LEM Papers Series 2002/10, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  6. 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.
  7. 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.
  8. repec:dgr:uvatin:20030010 is not listed on IDEAS
  9. 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.
  10. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & van de Velden, Henk, 2008. "Expectations and bubbles in asset pricing experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 116-133, July.
  11. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:trn:utwpce:0503. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marco Tecilla)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.