Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets

@article{citeulike:996648, abstract = {Spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of T = 15 (or 30) trading periods. Fourteen of twenty-two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value. When traders are experienced this reduces, but does not eliminate, the probability of a bubble. The regression of changes in mean price on lagged excess bids (number of bids minus the number of offers in the previous period), P\"t - P\"t-1 = @a = @b(B\"t\"-\"1 - O\"t\"-\"1), supports the hypothesis that -@a = E(d), the one-period expected value of the dividend, and that @b \> O, where excess bids is a surrogate measure of excess demand arising from homegrown capital gains (losses) expectations. Thus when (B\"t\"-\"1 - O\"t\"\_\"1) goes to zero we have convergence to rational expectations in the sense of Fama (1970), that arbitrage becomes unprofitable. The observed bubble phenomenon can also be interpreted as a form of temporary myopia (Tirole, 1982) from which agents learn that capital gains expectations are only temporarily sustainable, ultimately inducing common expectations, or \"priors\" (Tirole, 1982). Four of twenty-six experiments, all using experienced subjects, yield outcomes that appear to the \"chart's eye\" to converge \"early\" to rational expectations, although even in these cases we get @b \> O, and small price fluctuations of a few cents that invite \"scalping.\"}, author = {Smith, Vernon L. and Suchanek, Gerry L. and Williams, Arlington W. }, citeulike-article-id = {996648}, journal = {Econometrica}, keywords = {bubbles}, number = {5}, pages = {1119--1151}, posted-at = {2007-11-15 18:52:48}, priority = {2}, title = {Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets}, url = {http://www.jstor.org/stable/1911361}, volume = {56}, year = {1988} }

TY - JOUR ID - citeulike:996648 L3 - citeulike-article-id:996648 TI - Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets JF - Econometrica VL - 56 IS - 5 SP - 1119 EP - 1151 N2 - Spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of T = 15 (or 30) trading periods. Fourteen of twenty-two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value. When traders are experienced this reduces, but does not eliminate, the probability of a bubble. The regression of changes in mean price on lagged excess bids (number of bids minus the number of offers in the previous period), P"t - P"t-1 = @a = @b(B"t"-"1 - O"t"-"1), supports the hypothesis that -@a = E(d), the one-period expected value of the dividend, and that @b > O, where excess bids is a surrogate measure of excess demand arising from homegrown capital gains (losses) expectations. Thus when (B"t"-"1 - O"t"_"1) goes to zero we have convergence to rational expectations in the sense of Fama (1970), that arbitrage becomes unprofitable. The observed bubble phenomenon can also be interpreted as a form of temporary myopia (Tirole, 1982) from which agents learn that capital gains expectations are only temporarily sustainable, ultimately inducing common expectations, or "priors" (Tirole, 1982). Four of twenty-six experiments, all using experienced subjects, yield outcomes that appear to the "chart's eye" to converge "early" to rational expectations, although even in these cases we get @b > O, and small price fluctuations of a few cents that invite "scalping." KW - bubbles AU - Smith, Vernon AU - Suchanek, Gerry AU - Williams, Arlington PY - 1988/// UR - http://www.jstor.org/stable/1911361 ER -