does investor risk perception drive asset prices in markets experimental evidence abstract we explore how individual risk perception influences prices and trading behavior in a market setting specifically our study lets experimental participants trade assets characterized by varying shapes of return distributions while common mean variance models predict identical prices for most of our assets we find trading prices to differ significantly assets that are perceived as being less risky on average despite having identical volatility trade at significantly higher prices individually traders who perceive a certain asset to be less risky are also net buyers on average with regard to different risk measures our results show that the probability of a loss is the strongest predictor of transaction prices and risk perception all these results hold also for experienced traders and when traders can trade two assets at the same time

bubbles and experience an experiment we investigate the occurrence of bubble crash pricing patterns in laboratory financial markets with a mixture of experienced and inexperienced traders we find that even with a minority of experienced traders bubbles are substantially abated

wage stagnation rising inequality and the financial crisis of 2008 the most widely embraced explanations of the financial crisis of 2008 have centered upon inadequate regulation stemming from laissez faire ideology combined with low interest rates although these widely acknowledged causal factors are true beneath them lie deeper determining forces that have received less notice wage stagnation and a dramatic increase in inequality in the u s over the preceding 35 years wage stagnation and heightened inequality generated three dynamics that made the economy vulnerable to systemic dysfunction the first is that they constrained consumption reducing profitable investment potential in the real economy and thereby encouraging an every wealthier elite to flood financial markets with credit helping keep interest rates low encouraging the creation of new credit instruments and greater indebtedness and fueling speculation the second dynamic is that consumption externalities were generated forcing individuals to struggle harder to find ways to maintain the welfare of their families and maintain their relative social status the consequence was that over the preceding three decades household saving rates plummeted households took on ever greater debt and worked longer hours the third dynamic is that as the rich took larger shares of income and wealth they gained more command over ideology and hence politics reducing the size of government cutting taxes on the rich and reducing welfare for the poor deregulating the economy and failing to regulate newly evolving credit instruments flowed out of this ideology

are price limits really bad for equity markets despite widely documented criticisms price limit rules are present in many equity markets around the world using a game theoretic model we argue that if the cost of monitoring a market is high price limit rules are beneficial empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction we find that the probability of the existence of price limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure more corruption and less efficiency in legal regulatory and technological environments

probability judgment error and speculation in laboratory asset market bubbles in 12 sessions conducted in a typical bubble generating experimental environment we design a pair of assets that can detect both irrationality and speculative behavior the specific form of irrationality we investigate is the probability judgment error associated with lowprobability high payoff outcomes independently we test for speculation by comparing prices of identically paying assets in multiperiod versus single period markets we establish that aggregate irrationality measured in one dimension probability judgment error is associated with aggregate irrationality measured in another bubble formation

thar she bursts reducing confusion reduces bubbles to explore why bubbles frequently emerge in the experimental asset market model of smith suchanek and williams 1988 we vary the fundamental value process constant or declining and the cash to asset value ratio constant or increasing we observe high mispricing in treatments with a declining fundamental value while overvaluation emerges when coupled with an increasing c a ratio a questionnaire reveals that the declining fundamental value process confuses subjects as they expect the fundamental value to stay constant running the experiment with a different context stocks of a depletable gold mine instead of stocks significantly reduces mispricing and overvaluation as it reduces confusion jel c91 d14 g11 g12

it is not just confusion strategic uncertainty in an experimental asset market to what extent is the observed mispricing in experimental asset markets caused by strategic uncertainty and by confusion we address this question by comparing subjects initial price forecasts in two market environments one with six human traders and the other with one human and five computer traders we find that both strategic uncertainty and confusion contribute equally to the median initial forecast deviation from the fundamental value the effect of strategic uncertainty is greater for subjects with a perfect score in the cognitive reflection test and it is not significant for those with low scores

an alternative time series model of consumption some empirical evidence this paper presents some empirical evidence for a time series model of aggregate consumer expenditure which is formulated in continuous time it is argued that such models expressed in terms of stochastic differential equations are more realistic in representing the dynamic evolution of many economic time series particularly at the aggregate level however such models impose complicated restrictions on the discretely observed data which must be taken account of in estimation the appropriate methodology is applied to a version of the consumption function for uk data and is found to provide a good description of the data the estimated continuous time model is compared with more popular discrete models and is found to provide superior dynamic post sample predictions over 16 quarters the formulation of econometric models in continuous time may provide an alternative and potentially successful approach to the modelling of time series in many aspects of economics

bubbles crashes and endogenous expectations in experimental spot asset markets1 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 pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o 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 0 and small price fluctuations of a few cents that invite scalping

rank matters the impact of social competition on portfolio choice tournament incentives schemes have been criticized for inducing excessive risk taking among financial market participants in this paper we investigate how relative performance based incentive schemes and status concerns for higher rank influence portfolio choice in laboratory experiments we find that both underperformers and over performers adapt their portfolios to their current relative performance preferring either positively or negatively skewed assets respectively most importantly these results hold both when relative performance is instrumental for higher payoffs in a tournament and when it is only intrinsically motivating and not payout relevant we find no effects when no relative performance information is given

zero interest rate policy and unintended consequences in emerging markets since 2009 central banks in the major advanced economies have held interest rates at very low levels to stabilise financial markets and support the recovery of their economies this paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets the paper is informed by a mises hayek bis view on credit booms and mises law of unintended consequences consistent with the presented credit boom view i provide evidence that the very low world funding interest rates are associated with a rise in volatile capital flows and asset market bubbles in fast growing emerging markets in line with mises law i further show that these unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

mathematical modelling in the wake of the crisis a blessing or a curse what does the economics profession say the economics profession has been heavily criticised for not anticipating the economic crisis that began in 2007 and even now economists seem unable to suggest ways out of this crisis it is widely acknowledged that the emphasis of modern economics over the last 50 years has been heavily mathematical and formalistic the aim of this paper is to examine whether in the wake of the crisis academic economists have examined this emphasis on mathematics and further to investigate the extent to which they are considering changing their methodological orientation the results of our field study show that many economists have tended to reaffirm their position and argued for the use of newer better mathematical models in economics

time to reject the privileging of economic theory over empirical evidence a reply to lawson the present financial and economic crisis has revealed a systemic failure of academic economics and emphasized the need to re think how to model economic phenomena lawson 2009 seems concerned that critics of standard models now will fill academic journals with contributions that make the same methodological mistakes albeit in slightly different guise in particular he is rather sceptical to use of mathematical statistical models such as the cvar approach as a way of learning about economic mechanisms in this paper i discuss whether this is a relevant claim and argue that it is likely to be based on a misunderstanding of what a proper statistical analysis is and can offer in particular i argue that the strong evidence of near unit roots and structural breaks in economic variables suggests that standard economic models need to be modified or changed to incorporate these strong features of the data furthermore i argue that a strong empirical methodology that allows data to speak freely about economic mechanisms such as the cvar would ensure that important information in the data is not over heard when needed adequately applied such models would provide us with an early warnings system signalling that the economy is moving seriously out of equilibrium

how do experienced traders respond to inflows of inexperienced traders an experimental analysis we conducted asset market experiments where one experienced subject interacts with five inexperienced subjects to investigate how experienced subjects change their price forecasts and trading behavior when faced with strategic uncertainty caused by inflows of inexperienced subjects only half the experienced subjects initially forecasted prices deviating more from the fundamental values in the market with five inexperienced subjects than in the final round of the experiment in which they had previously participated furthermore the majority of our experienced subjects did not change their trading behavior many experienced subjects act as price stabilizers when the inflow of inexperienced subjects is not associated with other changes in market conditions

on forecasting uk consumption this paper is concerned with the search for the appropriate methodology for constructing an econometric model for forecasting aggregate consumption forecasts of the various national income categories such as consumption investment exports etc is an important pre requisite of macroeconomic policy it is such forecasts welded within the framework of a macroeconomic model which provide the policy makers with the information on which to base economic policy ideally a good forecasting model should have the properties of 1 being parsimonious in the use of information especially current information on endogenous variables 2 be simple to manipulate and 3 should work well in the econometric sense a fourth criterion namely being strongly founded in economic theory is more open to dispute for example the time series forecasting models developed by box and jenkins need not rely on economic theory at all without pushing the point too far one could argue that at least to economists economic theo

classroom games speculation and bubbles in an asset market this paper describes a classroom exercise in which students trade assets of uncertain value in a sequence of market periods assets pay one dollar dividends at the end of each period but once the dividend is paid there is fixed probability that the asset will be destroyed dividends and probabilities are chosen so that the fundamental value is constant over time speculative bubbles can be caused by divergent expectations about other traders valuations of the asset this exercise provides an interactive framework that facilitates discussions of discounting rational expectations and backward induction

price bubbles and crashes in experimental call markets abstract price bubbles relative to intrinsic dividend value are observed using a call market trading institution market prices tend to track intrinsic value only when the same group of highly experienced traders participate in three consecutive 15 round markets

prices debt and market structure in an agent based model of the financial market we develop an agent based model in which heterogeneous and boundedly rational agents interact by trading a risky asset at an endogenously set price agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side a number of findings emerge when simulating the model we find that the empirically observable log normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents furthermore greater leverage increases the frequency of bankruptcies and systemic events credit frictions which we define as the stickiness of debt adjustments are able to explain a key difference in the relation between leverage and assets observed for different bank types lowering credit frictions leads to an increasingly procyclical behavior of leverage which is typical for investment banks nevertheless the impact of credit frictions on the fragility of the model financial system is complex lower frictions do increase the stability of the system most of the time while systemic events become more probable in particular we observe an increasing frequency of severe liquidity crises that can lead to the collapse of the entire model financial system

stock market participation and endogenous boom bust dynamics abstract we develop a model in which stock market participation depends on current market movements and on the fundamental state of the market our model explains empirical and experimental evidence according to which increasing decreasing stock market participation amplifies bubbles crashes

behavioral uncertainty and the dynamics of traders confidence in their price forecasts by how much does the presence of behavioral uncertainty in an experimental asset market reduce subjects confidence in their price forecasts an incentivized interval forecast elicitation method is employed to answer this question each market consists of six traders and the value of dividends is known two treatments are considered six human traders 6h and one human interacting with five computer traders whose behavior is known 1h5c we find that while the deviation of the initial price forecasts from fundamental value is smaller in the 1h5c treatment than in the 6h treatment albeit not statistically significantly the average confidence regarding the forecasts is not we further analyze the relationships between subjects confidence in their forecasts and their trading behavior as well as their trading performance in the 6h treatment while subjects high confidence in their short term forecasts shows a negative correlation with their trading performance high confidence in their long term forecasts shows a positive correlation with trading performance

digital options and efficiency in experimental asset markets abstract in asset markets extraordinary price run ups bubbles followed by crashes back to levels closer to fundamental values have been shown to adversely affect the real economy leading to inefficient resource allocation and underinvestment conversely derivative markets contribute to price discovery and lead to informationally more efficient prices in the market for the underlying asset we combine these observations and test experimentally whether digital options a type of derivative that has recently been introduced to a wider audience via online prediction markets can reduce price bubbles in a laboratory setting we find that subjects do not use the derivative market to improve their expectations of future asset prices and analyze this result

social status and economic performance a survey abstract this survey combines ideas and results from sociology and economics recognizing that economic decisions are often shaped by social concerns and influences based on the sociological literature we define social status and describe its measurement we then describe the role of social status in economic analysis of saving and consumption wages and economic growth we review recent work on status determination in equilibrium including evolutionary models we conclude with some remarks on the need for further interaction between sociology and economics

introduction the global financial crisis there cannot now be a shadow of a doubt that the flaw in his ideology admitted by alan greenspan in response to a question by henry a waxman chairman of the us house of representatives committee on oversight and government reform whether he felt that your ideology pushed you to make decisions that you wish you had not made is both significant and permanent the current financial and economic crisis that has forced the likes of greenspan to question the coherence of dominant conceptual frameworks is unprecedented in global reach and systemic gravity some basic figures speak for themselves according to mckinsey s mapping global financial markets october 2008 global financial assets rose from us 12 trillion in 1980 to us 196 trillion in 2007 the international monetary fund s global financial stability report imf 2009a estimate for the latter figure is considerably higher at us 241 trillion global cross border capital flows more than doubled between 2002 and 2007 with foreign investors holding one in four debt securities and one in five equities while in 2000 only 11 countries had financial assets of more than 350 of gross domestic product gdp 25 countries had deepened their financial markets to the same extent by 2007 as early as 1990 money managers had increased their control of us corporate equities from 8 in 1950 to 60 porter 1992 p 6 whalen 2002 p 402 similarly pension funds had extended their share of total business equities from less than 1 to just short of 39 and their fraction of corporate debt from 13 to 50 ghilarducci 1992 p 117 whalen 2002 p 402 in the period from 1986 to 2006 the us financial sector as a whole increased its share of corporate profits from 10 to 30 while its outstanding debts grew from 20 of gdp in 1980 to 116 in 2007 fed 2009 according to gillian tett from the financial times outstanding credit defaults swaps cds today amount to no less than us 60 trillion with the risk embodied after discounting mutually off setting contracts still as high as us 14 trillion tett 2009 p 264 as we know the curtains have now come down on this dance of the trillions palma 2009 the immediate hang over in the form of a pile of toxic debt is surreal not only in its

to see is to believe common expectations in experimental asset markets abstract we experimentally manipulate agents information regarding the rationality of others in a setting in which previous studies have found irrationality to be present namely the asset market experiments introduced by smith et al 1988 recent studies suggest that mispricing in such markets may be an artefact of confusion which can be reduced by training subjects to understand the diminishing fundamental value we reconsider this view and propose that when it is made public knowledge that training has occurred this may also reduce uncertainty over the behavior of others and facilitate the formation of common expectations our design disentangles the direct effect of training from the indirect effect of its public knowledge and our results demonstrate a distinct and statistically significant effect of public knowledge over and above that of training alone

the inflow effect trader inflow and price efficiency abstract we investigate the impact of cash and trader inflow on price efficiency in multi period experimental asset markets implementing eight treatments with 672 subjects we find that i the joint inflow of cash and traders triggers strong overvaluation and massive price run ups inflow effect remarkably the effect occurs in almost all of the 30 markets with joint cash and trader inflow and is very robust the effect even prevails in markets with complete and symmetric fundamental information we further show that ii in treatments with the joint inflow of cash and traders prices crash to fundamentals towards maturity of the asset the analysis of traders beliefs reveals that iii despite fundamental values staying constant beliefs about fundamentals co move with upwardly trending prices finally we report a speculative motive only among the optimists in treatments where we observe the inflow effect

on booms that never bust ambiguity in experimental asset markets with bubbles we study the effect of ambiguity on the formation of bubbles and on the occurrence of crashes in experimental asset markets a la smith suchanek and williams 1988 we extend their framework to an environment where the fundamental value of the asset is ambiguous we show that when the fundamental value is ambiguous asset prices tend to be lower than when it is risky although bubbles form in both the ambiguous and the risky environments additionally bubbles do not crash in the ambiguous case whereas they do so in the risky one these findings regarding depressed prices and the absence of crashes in the presence of ambiguity are in line with recent theoretical work stressing the crucial role of ambiguity to account for surprisingly low equity prices high returns as well as herding in asset markets

heterogeneity of beliefs and trade in experimental asset markets we investigate the relationship between traders expectations and market outcomes with experimental asset market data the data show that those who have high price expectations buy more frequently and submit higher bids and those who hold low price expectations sell more frequently and submit lower bids traders who have more accurate expectations achieve greater earnings simulations using only belief data reproduce the pricing patterns observed in the market well indicating that the heterogeneity of expectations is a key to explaining market activity

bubbles and financial professionals the efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates yet little is known about the contribution of financial professionals to price efficiency we run 116 experimental markets with 412 professionals and 502 students we find that professional markets with bubble drivers capital inflows or high initial capital supply are susceptible to bubbles although they are more efficient than student markets in mixed markets with students bubbles also occur but professionals act as price stabilizers we show that heterogeneous price beliefs drive overpricing especially in bubble prone market environments

how the world achieved consensus on monetary policy the worldwide progress in monetary policy is a great achievement and especially considering the situation 30 years ago a remarkable success story i describe how the world achieved a working consensus on the core principles of monetary policy by the late 1990s i survey the muddled state of affairs in the 1970s and then ask what happened in federal reserve policy to produce an understanding of the practical principles of monetary policy how did formal institutional support for targeting low inflation abroad follow from an international acceptance of these ideas and how did a consensus theoretical model develop in academia i explain how the modern theoretical consensus known alternatively as the new neoclassical synthesis or the new keynesian model of monetary policy reinforces key advances the priority for price stability the targeting of core rather than headline inflation the importance of credibility for low inflation and preemptive interest rate policy supported by transparent objectives and procedures of course a working consensus does not constitute complete agreement accordingly the conclusion identifies important monetary policy issues that remain to be explored

boundaries of the tournament pricing effect in asset markets evidence from experimental markets 1 introduction when traders in experimental asset markets are compensated according to a tournament contract a salary plus bonus scheme in which a trader s bonus is proportional to the amount by which that trader exceeds the average performance in that market we observe violation of convergence results obtained in experiments that did not use such compensation schemes this effect of tournament incentives has been documented by james and isaac 2000 in this paper we search for what smith and williams 1990 have termed the boundaries of falsification for the proposition that tournament contracts affect asset market prices specifically we examine the robustness of the tournament pricing effect on market prices on several fronts first we ask whether the pricing effect survives when not all traders are being compensated according to the beat the market contract second we ask whether the tournament pricing effect is robust with respect to perturbations in the trader s compensation contract third we ask whether the pricing effect is observed in two period asset life markets hereafter 2 p a l markets as it is in 15 period asset life markets hereafter 15 p a l markets 1 section 2 presents the background of the current experiments the research conjectures and the experimental design the experimental results are contained in section 3 section 4 discusses a phenomenon that we had not encountered until these experiments section 5 offers the conclusions and thoughts for further reflection 2 conjectures and experimental design background james and isaac 2000 was the first paper to assess the effect on asset market prices of tournament contracts imposed at the individual level this is distinct from an earlier paper by brown harlow and starks 1996 that examines how individual portfolio managers allocation decisions change in response to such contracts but that does not address the issue of any effects on prices of the assets the portfolio managers are trading brown harlow and starks is itself a specific application of a wider literature on using tournament contracts to address principal agent conflicts see also nalebuff and stiglitz 1983 bull schotter and weigelt 1987 and ehrenburg and bognanno 1990 the issue of the effect on market prices is arguably the most important one surrounding the imposition of tournament contracts on portfolio managers because it is these capital market prices that help allocate savings to different forms of investment naturally misleading capital market prices can potentially lead to catastrophically misdirected capital spending 2 this key aspect of james and isaac that it addresses the effect at the market level of using tournament incentives at the individual level is also present in this paper the research objective of this paper is to document the eventual market level ramifications of varying the use of tournament contracts the nature of those variations will be discussed here the effect of tournament incentives on asset market prices prior to this paper it has been established that the way in which traders in experimental asset markets are compensated on an individual basis can significantly change the prices that eventuate at the market level in a seminal paper on experimental asset markets smith suchanek and williams 1988 hereafter ssw find that as groups of traders were called back for repeat sessions of a 15 p a l market which can be viewed as an experimental implementation of the theoretical market analyzed by tirole 1982 the market price of the asset bubbled less in each successive 15 period asset market this suggests that the no trading common expectations equilibrium derived by tirole might be reached eventually but requires experience on the part of the pool of traders of note in ssw the traders are compensated such that an experimental dollar corresponds to a u s dollar that is the traders respective experimental dollar holdings deriving variously from cash endowments dividend payments and capital gains are translated one for one into u

irrationality and beliefs in a laboratory asset market is it me or is it you abstract this paper reports on an experiment designed to examine individual and market outcomes with a mixture of rational and non rational traders using values elicited via auctions we measure a specific form of irrationality the tendency to overweight high payoff low probability events or probability judgment error subjects are classified by their tendency to exhibit errors as well as their beliefs regarding whether others will make errors subjects then participate in a series of double auction markets the results indicate that both probability judgment error and beliefs about other subjects susceptibility to probability judgment error have significant impact on individual and market outcomes

short selling constraints as cause for price distortions an experimental study in this paper we explore the influence of the possibility to short stocks and or borrow money in laboratory markets a key innovation of our study is that subjects can simultaneously trade two risky assets on two double auction markets allowing us to differentiate between assets with relatively high versus low capitalization divergence of opinions is created by providing each trader with noisy information on the intrinsic values of both assets we find that when borrowing money or shorting stocks is restricted prices are systematically distorted specifically stocks with high low capitalization are traded at lower higher prices than their fundamental value lifting the restrictions leads to more efficient prices and more liquidity thereby also lowering volatility and bid ask spreads

money as meta rule buchanan s constitutional economics as a foundation for monetary stability this paper explores james buchanan s contributions to monetary economics and argues these contributions form the foundation of a robust monetary economics paradigm while often not recognized for his contributions to monetary economics buchanan s scholarship offers important insights for current debates especially the renewed interest in narrow banking in the wake of the financial crisis we argue that the post 2007 crisis milieu creates a unique opportunity to recognize as buchanan did the vital role that money plays in the market as the grammar of commerce that recognition makes the need for more fundamental reform of our monetary regimes at the constitutional level more apparent making buchanan s work on monetary constitutions more relevant than ever before we then discuss how adopting buchanan s monetary framework can improve both monetary scholarship and institutions

the effect of short selling on bubbles and crashes in experimental spot asset markets a series of experiments illustrate that relaxing short selling constraints lowers prices in experimental asset markets but does not induce prices to track fundamentals we argue that prices in experimental asset markets are influenced by restrictions on short selling capacity and limits on the cash available for purchases restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner a simulation model based on delong et al 1990 generates average price patterns that are similar to the observed data asset market bubbles are persistent deviations of prices from fundamentals to the extent that bubbles exist they can influence investment levels and the allocation of capital and thereby have considerable economic effects in recognition of their potential importance the question of the existence and pervasiveness of bubbles has been a focus of extensive empirical investigation see e g shiller 1981 blanchard and watson 1982 diba and grossman 1988 and west 1988 these studies yield mixed results regarding the empirical relevance of bubble phenomena one source of the differences in conclusions may be that because the fundamental value of the assets cannot be observed tests of the presence of bubbles are joint tests with the particular specification of the process guiding the evolution of fundamentals also being tested the availability of short selling is widely believed to make bubble formation less likely one rationale for such a belief is the notion that the cause of asset market bubbles is a constraint on the ability of traders to speculate on future downward price movements see e g miller 1977 jarrow 1980 diamond and verrecchia 1987 or figlewski and webb 1993 in the absence of short sales traders may sell only the shares in their portfolios the availability of short sales relaxes this constraint in this paper we study empirically the effect of allowing short sales on both the incidence and magnitude of market bubbles we choose a setting in which the fundamental value of the asset is clearly and unambiguously defined and known at all times and bubbles typically occur namely we use the experimental environment that smith suchanek and williams 1988 introduce while

on the ingredients for bubble formation informed traders and communication bubbles in asset markets have been documented in numerous experiments most experiments in which bubbles occur feature a declining fundamental value this feature has been criticized for being atypical of real financial markets here we experimentally study other ingredients for bubble formation that are common in such markets namely the existence of inside information and communication among traders we find that bubbles and mirages can occur if these additional ingredients are present in particular the mere possibility that some traders are better informed than others can create bubbles surprisingly communication turns out to be counterproductive for bubble formation

the great crash of 2008 and the reform of economics the 2008 economic crash led to remarkable shifts of opinion among world leaders does this crisis create favourable conditions for the reform and revitalisation of economics itself from a subject dominated by mathematical techniques to a discipline more oriented to understanding real world institutions and actors and why were warnings of financial collapse not heeded recent shortcomings are partly related to the global triumph of market individualist ideology and partly to the exaggerated roles of modelling and quantification these failures of economics are partly peculiar to the discipline and also a result of other wider institutional and cultural forces

a survey of some recent econometric methods this survey is written mainly for the applied economist though we hope that the specialist econometrician will find something of interest too our aim has been to try to bring the applied worker as up to date as possible and in the process to improve the quality of applied work by providing access to the latest ideas in econometrics we have tried to describe and explain in a relatively non technical way the main developments that have taken place in the last ten years partly for reasons of space the survey is by no means exhaustive but it does cover a wide range of topics in both time series and cross section analysis among the subjects covered are the followoing the nature of data including integrated and fractionally integrated data four estimation methods maximum likelihood method of moments m estimators and non parametric estimation inference with stationary and integrated regressors a comparison of various model evaluation principles the formulation of models including dynamic specification cointegration and conditional expectations in mean and variance copyright 1989 by royal economic society

a collection of surveys on market experiments this paper highlights the contributions in this special issue to the very large and rapidly growing research on experimental markets it contains ten surveys of different streams of research in this area including asset markets contests environmental policy frictions general equilibrium labor markets multi unit auctions oligopoly markets and prediction markets

nonspeculative bubbles in experimental asset markets lack of common knowledge of rationality vs actual irrationality we report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets in a setting in which speculation is not possible bubbles and crashes are observed the results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation but rather by behavior that itself exhibits elements of irrationality much of the trading activity that accompanies bubble formation in markets where speculation is possible is due to the fact that there is no other activity available for participants in the experiment

confidence and decision making in experimental asset markets abstract this paper examines how traders confidence and market confidence affect outcomes in an experimental asset market with known fundamental values in this type of market prices usually present large deviations from the fundamental value in other words bubbles are known to occur we measure beliefs by asking participants to forecast the one period ahead price as a discrete probability mass distribution we define confidence as the inverse of the dispersion of beliefs for each trader and also create a market wide measure of this to measure agreement across traders we find that confidence affects price formation and is also important in explaining the dynamics and size of the bubble moreover as traders are successful they become increasingly certain of their beliefs even if these beliefs are on non fundamental values thus increasing the likelihood of price bubbles

margin short selling and lotteries in experimental asset markets the robustness of bubbles and crashes in markets for assets with finite lives is perplexing this paper reports the results of experimental asset markets in which participants trade two assets in some markets price bubbles form in these markets traders pay higher prices for the asset with lottery characteristics i e a claim on a large unlikely payoff however institutional design has a significant impact on deviations in prices from fundamental values particularly for an asset with lottery characteristics price run ups and crashes are moderated when traders finance purchases of the assets themselves and are allowed to short sell

forecasting with the almost ideal demand system evidence from some alternative dynamic specifications the almost ideal demand system is used as a representation of long run demands in discrete time and continuous time error correction models to produce forecasts of budget shares beyond the sample period the estimated models are subjected to a battery of tests and an analysis of the forecasts indicates that continuous time adjustment mechanisms based around fully modified estimates of the long run preference parameters provide a remarkably accurate method of forecasting budget shares

bubbles and experience an experiment with a steady inflow of new traders we revisit the effect of traders experience on price bubbles by introducing either one third or two thirds steady inflow of new traders in each of four consecutive experimental asset markets we find that bubbles are still reduced in the treatments with a steady inflow of new traders but at a slower pace compared to the baseline treatment in which new traders are only introduced in the last market our analysis of individual trading behavior shows that the slower abatement of bubbles in the inflow treatments can be attributed mainly to the inexperienced traders who make more mistakes than experienced traders

futures contracting and dividend uncertainty in experimental asset markets prices in experimental asset markets tend to bubble and then crash to dividend value at the end of the asset s useful life explanations for this phenomenon are 1 that participants cannot form reliable future price expectations or 2 dividend risk aversion we report the results of experiments to test these hypotheses in one experimental series a futures market is introduced so that participants can obtain information on future share prices in another series of experiments the per period dividend is known with certainty the futures market treatment reduced the bubble the certain dividend treatment had little effect on the character of bubbles with inexperienced traders copyright 1995 by university of chicago press

momentum and overreaction in experimental asset markets abstract price volatility and investor overreactions are commonplace in experimental asset markets understanding the price dynamics in these markets is crucial for designing successful new trading institutions we report on a series of experiments to test the predictions of a new momentum model using a dynamical systems approach this model is then pitted against several standard models to predict prices as well as against expert human forecasters the comparative results suggest that each model has its advantages and regions of best performance overall the best predictive methods are the momentum model and expert human forecasters

price bubbles gender and expectations in experimental asset markets abstract this paper reports results of laboratory markets for a risky asset with a flat fundamental value that equates expected dividends to the return on a safe asset subjects were sorted by gender in an unobtrusive manner and bubbles in this setting are pervasive and of comparable magnitude for both genders in contrast a robustness check done with a declining fundamental value did generate larger bubbles for groups of males elicited price forecasts tend to trail share prices as they rise and exceed prices as they fall a pattern that is tracked by a double adaptive forecasting model

deleveraging crises and deep recessions a behavioural approach macroeconomic dynamics are characterized by alternating patterns of periods of relative stability and large swings standard micro founded macro economic models account for these patterns through exogenous and persistent shocks in this paper we develop a fully decentralized and micro founded macro economic agent based model augmented with an opinion model which produces endogenous waves of pessimism and optimism that feed back into firms leverage and households precautionary saving behaviour a major emergent property of our model is precisely the complex successions of stable and unstable macro economic regimes the model is further able to account for a wide spectrum of macro and micro empirical regularities within this framework we analyse a series of macro economic phenomena of key relevance in the current macro economic debate especially the occurrence of deleveraging crises and fisherian debt deflation recessions our analysis suggests that the relative dynamics of prices and wages and the resulting income distribution along a deflation ary path are critical determinants of the severity of the recession and the chances of recovery

the effect of reliability content and timing of public announcements on asset trading behavior financial markets are overwhelmed by daily announcements we use experimental asset markets to assess the impact of releasing public messages with different levels of reliability on asset prices subjects receive qualitative announcements in predetermined trading periods that are either preset by the experimenter randomly selected or determined by past asset market prices we find that messages can play a significant role in bubble abatement or rekindling the preset message the price is too high decreases the amplitude and duration of bubbles for inexperienced subjects announcements that depend on the actual level of mispricing reduce bubble magnitude meanwhile a preset or random message the price is too low prevents experienced subjects from abating bubbles we account for the effect of public messages by showing that they significantly reduce inconsistent irrational trading behavior

differentiated assets an experimental study on bubbles i introduction the bubble and crash phenomenon in experimental asset markets first reported in smith suchanek and williams 1988 has been shown to be rather robust to various manipulations in the experimental design see e g king et al 1993 porter and smith 1995 van boening williams and lamaster 1993 1 in all these markets an asset with a life of 15 or 30 periods is traded the asset pays a common dividend to all holders at the end of each trading period and the dividend structure is common knowledge to all traders rather than tracking the fundamental value which is derived from the expected dividend for the number of periods remaining prices tend to exhibit a prolonged boom and crash pattern in a vast majority of the markets studied in the literature note that the bubble and crash phenomenon has also been observed in a setting where two assets are traded in two separate double auction markets simultaneously fisher and kelly 2000 study rate of return parity in such an environment the main treatment variable that they consider is the expected dividends of the assets in some treatments the two assets pay exactly the same expected dividend whereas in some others one asset pays twice as much they find that bubbles not only exist in both markets but also positively correlate with each other childs and mestelman 2006 manipulate the expected dividend as well as the variance of the dividends their findings are consistent with fisher and kelly s in that bubbles occur in both markets and that rate of return parity receives less support as the assets become more differentiated the main objective of this paper is to continue the research line initiated by fisher and kelly 2000 and investigate if and how differences in assets characteristics affect investors trading strategies and as a result the magnitude of bubbles motivated by empirical evidence which suggests that bond markets are in general less susceptible to the dramatic boom and crash price pattern we first construct a bond market like laboratory environment where investors are free to trade assets that can be differentiated not only from their dividend payments but also from their maturity periods 2 the research questions we ask are as follows does the existence of multiple assets that can be differentiated from their dividends and or maturities help reduce mispricing and if so why to tackle these questions we adopt a 2 x 2 design in which an asset called x has a 30 period life duration and pays on average 7 francs per period as a dividend these intrinsic characteristics are fixed in all treatments the characteristics of an alternative asset called y on the other hand vary depending on the treatment it pays either the same expected dividend as x or twice as much in terms of its life duration it lasts either 30 or 15 periods as a result we have the following four treatments for this set of the experiment sdursdiv baseline sdurddiv ddursdiv and ddurddiv where s d dur and div stand for same different duration and dividend respectively if we assume that traders have common and rational expectations we would expect prices to follow fundamental values in both markets but since the evidence of the bubble and crash phenomenon is so overwhelming in the literature we feel that evaluating a hypothesis of no bubbles is a bit insensitive instead we propose the following hypothesis for evaluation hypothesis 1 price deviations from the fundamental in either x or y market do not depend on if and how the two assets are intrinsically different we also evaluate the relative price between the two assets against the prediction of rate of return parity as in fisher and kelly 2000 and childs and mestelman 2006 the null hypothesis that we advance for evaluation is stated as follows hypothesis 2 deviations from the prediction of rate of return parity do not depend on if and how the two assets are intrinsically different

thar she blows can bubbles be rekindled with experienced subjects we report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and error elimination among participants in a laboratory asset market and its effect on price bubbles our answer to the title question is yes we impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium and this treatment rekindles a bubble however in replications of that same challenging environment across three experience levels we discover that the environment yields a rare residual tendency to bubble even in the third experience session therefore a caveat must be placed on the effect of twice experienced subjects in asset markets in order for price bubbles to be extinguished the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters experience including possible error elimination is not robust to major new environment changes in determining the characteristics of a price bubble jel c91 d83

experiments on electronic double auctions and abnormal trades the flash crash experienced by u s markets in may 2010 provided stark evidence that a large trade can have a powerful influence we explore the impact of an unusual trade on behavior in experimental bubbles markets we chose the experimental design proposed by smith suchanek and williams 1988 because replication shows it produces markets prone to mispricing after several rounds of trading our markets receive a large quantity order at an extreme price in a standard double auction bubble market pricing is unaffected by an abnormal order however with increased uncertainty about the underlying economic value of the asset over pricing weakens on arrival of a negative price shock

cash inflows and bubbles in asset markets with constant fundamental values previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time this contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time we report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time thus high cash levels will lead to bubbles if the cash is introduced before the market opens our results reconcile the two previous sets of findings jel c90 d03 g02 g12 i introduction smith suchanek and williams 1988 initiated the experimental study of markets for multiperiod finitely lived assets a considerable subsequent literature has consistently observed price bubbles in such markets this consistency makes the smith et al paradigm a popular one for identifying and studying the factors that promote or dampen bubbles see palan 2013 for a survey of this literature it is known that some key market parameters influence prices and the tendency for bubbles to form two of these parameters are 1 the time trajectory of fundamental values and 2 the quantity of cash available for purchases compared to the quantity of assets available for sale a number of studies in this literature have contrasted the behavior of different fundamental value time paths the speed and effectiveness of price discovery the tendency of market prices to track fundamentals depend on the time path of the fundamental value trajectory breaban and noussair 2015 giusti jiang and xu 2012 noussair and powell 2010 stockl huber and kirchler 2014 a trajectory that is constant over time generates closer adherence to fundamental values than a time path that is monotonically decreasing kirchler huber and stockl 2012 noussair robin and ruffieux 2001 smith van boening and wellford 2000 1 another variable influencing market prices is the amount of liquidity traders have available for purchases it is well established that in the case of decreasing fundamentals the price level is affected by liquidity as measured by cash endowment levels greater cash endowments lead to higher prices caginalp and ilieva 2008 caginalp porter and smith 1998 2000 2001 haruvy and noussair 2006 cash and asset endowment levels are typically normalized into a measure of liquidity called the cash to asset c a ratio caginalp porter and smith 2001 this is the ratio of cash in the economy the total amount available for purchases of assets to the value of all of the units of asset in the economy evaluated at the fundamental value in period t the c a ratio is given by c a sub t summation over i c sub it summation over i q sub it f sub t where c a sub t is the c a ratio in period t c sub it is the cash available to trader i in period t q sub it is the quantity of units that trader i holds in period t and f sub t is the period t fundamental value the ratio can be interpreted as the ratio of the largest long position to the largest short position an average trader can take assuming that the market price is equal to the fundamental to date it has been shown that the cash asset ratio affects prices only for the case when fundamental values are decreasing to our knowledge only two studies have explored the effect of cash on prices when fundamentals are constant over time kirchler huber and stockl 2012 hereafter khs and kirchler et al 2015 in both of these studies the additional cash is introduced after one or more periods of trading have elapsed rather than before the market opens khs report that increases in cash endowments do not affect prices in the case of constant fundamental values because the authors interpret bubbles as a consequence of subject confusion about the experimental environment they conclude that the constant fundamental value setting leads to less confusion on the part of subjects

futures markets cognitive ability and mispricing in experimental asset markets we study the effect of a futures market in which contracts maturing in the last period of the life of the asset can be traded our experiment has two treatments one in which a spot market operates on its own and a second treatment in which a spot and a futures market are active simultaneously futures markets lower spot prices but increase price volatility the futures markets themselves exhibit considerable overpricing individuals with higher cognitive reflection test crt scores achieve greater earnings and tend to sell in the overpriced futures market while traders with lower crt scores make purchases in the futures market greater average crt score among a group of traders is associated with better price discovery when no futures market is present but there is no such relationship in the presence of a futures market modified measures of crt which take into account different types of incorrect responses are introduced

a review of bubbles and crashes in experimental asset markets this paper discusses the literature on bubbles and crashes in the most commonly used experimental asset market design introduced by smith et al it documents the main findings based on the results from 41 published papers 3 book chapters and 20 working papers

a test of the modigliani miller invariance theorem and arbitrage in experimental asset markets modigliani and miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage free we investigate this invariance theorem in experimental asset markets finding value invariance for assets of identical risks when returns are perfectly correlated however exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated in which case the law of one price is violated discrepancies shrink in consecutive markets but persist even with experienced traders in markets where overall trader acuity is high assets trade closer to parity

out of the corridor keynes and the crisis we should learn from keynes to focus on the macroproblems of our day today s problem is the financial crisis and the resulting great recession neither the standard keynesian policies of decades past nor the monetary policy doctrine of recent years provides useful solutions dynamic stochastic general equilibrium theory is part of the crisis wreckage but turning to old or to new keynesian theory will be of little use a balance sheet recession requires that policy address the problems in the private sector s capital as well as its income accounts we need serious theoretical work on problems of system stability using for example agent based methods monetary theory needs to develop analysis of processes in which intertemporal budget constraints are violated network theory will be useful in that quest