expectationally driven market volatility an experimental study abstract we study the existence and robustness of expectationally driven price volatility in experimental overlapping generation economies in the theoretical model under study there exist pure sunspot equilibria which can be learned if agents use some adaptive learning rules our data show the existence of expectationally driven cycles but only after subjects have been exposed to a sequence of real shocks and learned a real cycle in this sense we show evidence of path dependent price volatility journal of economic literature classification numbers c62 c92 f17 e32 e44

oil price shocks economic policy uncertainty and industry stock returns in china asymmetric effects with quantile regression abstract this paper investigates the impact of crude oil shocks and china s economic policy uncertainty on stock returns at different locations on the return distributions based on monthly data from 1995 1 to 2016 3 we address this issue by employing the quantile regression technique this approach enables a more detailed investigation in different market circumstances namely bearish normal and bullish markets empirical results indicate that the effects of oil price shocks and economic policy uncertainty are asymmetric and highly related to stock market conditions moreover both the nexus of oil and economic policy uncertainty stock are changed at the onset of a crisis specially rising oil prices have greater negative effects on stock returns when stock markets are bullish extreme higher quantiles before a crisis whereas the effects are significantly positive under different market conditions after the onset of the crisis falling oil prices lower stock returns when stock markets are bullish and normal before the crisis whereas lower stock returns under different market conditions except extreme bullish after the onset of the crisis these findings might be related to the optimistic or pessimistic investor sentiments and investors might become more frightened after the crisis

the role of markets in reducing expected utility violations market theorists assume that expected utility predicts preferences at the market level even as evidence mounts that it predicts poorly at the individual level the arguments for better performing markets are grounded in the assumption that individuals respond to the competition of the market the objective of this study is to test empirically the validity of those assumptions using the betweenness property of expected utility i conclude that expected utility does indeed predict better in markets but analyses suggest that improved performance may be due to the statistical role played by markets introduced by market price selection rules

long run purchasing power parity with asymmetric adjustment 1 introduction despite its intuitive appeal there is inconclusive evidence supporting purchasing power parity ppp between countries with low inflation rates during the post bretton woods period for example enders 1988 taylor 1988 and macdonald 1993 use various forms of cointegration tests called stage three tests and find that real exchange rates exhibit large fluctuations with slow rates of decay toward a long run mean froot and rogoff s 1995 literature review presents a consensus estimate that deviations from long run ppp have a half life of about three years this is somewhat disappointing since stage three tests seem to be well suited to the task they require no assumptions concerning exogeneity and they imply a sensible dynamic relationship among price levels and the exchange rate the vast literature on ppp is indicative of the importance of the issue and the ambiguity of the findings it is well recognized that standard cointegration tests have low power to reject the null hypothesis of no cointegration this observation is especially relevant for ppp since any mean reversion in real rates is very gradual and the length of the post bretton woods period sample period is relatively short efforts to increase the power of unit root and stage three tests have had mixed success for example lothian and taylor 1996 and mark 1990 have tried to circumvent the low power of stage three tests by using long spans of time series data unfortunately the use of long time spans raises the possibility of structural changes occurring during the period being examined panel unit root tests are generally more supportive of ppp than are bilateral tests of real exchange rate behavior for example oh 1996 wei and parsley 1995 and wu 1996 have used panel data in order to enhance the power of standard unit root tests although these particular articles are supportive of ppp panel studies must deal with the thorny issues of cross sectional correlation and the choice of the nations to include in the panel papell 1997 finds that allowing for serial correlation substantially weakens the evidence in favor of long run ppp o connell 1998 applies generalized least squares to panel data to eliminate any contemporaneous correlation in the error structure and finds no evidence supporting ppp the second problem with the standard unit root and cointegration tests is that they implicitly assume symmetric adjustment however official intervention in the foreign exchange market means that nominal exchange rate adjustment may be asymmetric under a managed float for example one of the monetary authorities might be more willing to tolerate currency appreciation than depreciation similarly a currency band mitigates exchange rate movements until the level of the band is altered furthermore the slow adjustment of real exchange rates is often explained by the stickiness of national price levels for example in the well known dornbusch 1976 overshooting model prices and the exchange rate move in the same proportion as the money supply in the very long run however in the short run prices are sticky and monetary shocks cause ppp deviations since the exchange rate moves proportionately more than prices rhee and rich 1995 and madsen and yang 1998 provide empirical evidence corroborating the implications of the asymmetric price adjustment models the key point to note is that if prices are primarily sticky in the downward direction there is no reason to presuppose that real exchange rate adjustment is symmetric in spite of the evidence supportive of asymmetric exchange rate and price adjustments there are only a few nonlinear tests of ppp although they do not explicitly test for ppp michael nobay and peel 1997 and taylor and sarno 1998 estimate real exchange rates as smooth transition threshold adjustment processes enders and falk 1998 formally apply various nonlinear unit root tests to real exchange rates and find little evidence of ppp

nonlinear adjustment to purchasing power parity in the post bretton woods era abstract this paper models the dynamics of adjustment to long run purchasing power parity ppp over the post bretton woods period in a nonlinear framework consistent with the presence of frictions in international trade we estimate exponential smooth transition autoregressive estar models of deviations from ppp which are obtained using the johansen cointegration method for both consumer price index cpi and wholesale price index wpi based measures and a broad set of us trading partners in several cases we find clear evidence of a mean reverting dynamic process for sizable deviations from ppp with the equilibrium tendency varying nonlinearly with the magnitude of disequilibrium analysis of impulse response functions also supports a nonlinear dynamic structure but convergence to long run ppp in the post bretton woods era is very slow

a strategy experiment in dynamic asset pricing this study presents a strategy experiment in a simple dynamic asset pricing model where the current market equilibrium asset price is determined by aggregated individual expectations of next period s price after participating in an introductory laboratory experiment on expectation formation participants formulate a complete forecasting strategy these strategies are programmed and markets are simulated participants receive feedback from the results of these simulations and can adapt their strategy four rounds are played and the entire experiment lasts eight weeks a final laboratory experiment compares predictions of participants with the predictions of the submitted strategy we find that most of the participants submit complicated strategies and that strategies become more complicated over the rounds most markets converge to a steady state price only after many periods if at all the number of converging price sequences increases over the rounds these results suggest in general slow convergence and learning of the subjects over the rounds even in a stationary environment learning the correct fundamental price level turns out to be difficult an important part of the non convergence seems to be caused not by individual strategies but by the interaction of several strategies from the final experiment we conclude that the strategies are a good representation of what participants do in a laboratory experiment

price controls and the behavior of auction markets an experimental examination price ceilings and price floors are common in all market systems the ancient greeks and hellenistic era egyptians are known to have utilized price controls see h michele p 272 and j p levy p 41 and numerous public policy questions today involve them apparently for as long as price controls have existed their effects have been debated for example diocletion s favorable view of his price ceilings was disputed by the religious philosopher lactantius who charged that the policy led to scarcity and low grade articles p 145

long run purchasing power parity with asymmetric adjustment further evidence from african countries this study applies threshold cointegration test advanced by enders and siklos 2001 to investigate the properties of asymmetric adjustment in long run purchasing power parity ppp in 22 selected african countries during the period of january 1980 to december 2003 although there is evidence of long run ppp for most african countries the adjustment mechanism is asymmetric these results have particularly important policy implications for african countries

evolution and market competition abstract profit maximization is the usual prerequisite for achievement of a perfectly competitive equilibrium however for a long time it has been though that this principle of profit maximization can be replaced by natural selection in an evolutionary model of an industry where firms outputs are chosen randomly where entry occurs with no motivation and where exit occurs when a firm s wealth becomes negative this paper shows that the industry converges in probability to a perfectly competitive equilibrium as each firm gets infinitesimally small relative to the market as the entry cost gets sufficiently small and as time gets sufficiently large journal of economic literature classification numbers d21 d41 l10

the inadequacy of linear autoregressive model for real exchange rates empirical evidence from asian economies utilizing the formal linearity test of luukkonen saikkonen and terasvirta biometrika 75 491 499 1998 as diagnostic tool the empirical finding suggests that the linear autoregressive ar model is inadequate in describing the real exchange rates behaviour of 11 asian economies it is noted that the conventional battery of diagnostic tests is capable of identifying the inadequacy of the linear model in only three of these series moreover the linearity nature of this behaviour has been formally rejected in favour of the non linear smooth transition autoregressive star model the finding of non linearity in the data generating process of these real exchange rates warrants that the use of linear framework in empirical modelling and statistical testing procedures in the field of exchange rates may lead to an inappropriate policy conclusions

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

price formation in single call markets this paper reports a laboratory experiment designed to examine the price formation process in a simple market institution the single call market the experiment features random values and costs each period so each period generates a new price formation observation other design features are intended to enhance the predictive power of the bayesian nash equilibrium bne theory developed recently for this trading institution we find that the data support several qualitative implications of the bne but that subjects bid and ask behavior is not as responsive to changes in the pricing rule as the bne predictions bids and asks tend to reveal more of the underlying values and costs than predicted particularly when subjects are experienced nevertheless observed trading efficiency falls below the bne prediction the results offer more support for the bne when subjects compete against nash robot opponents a simple learning model accounts for several of the deviations from bne

price formation in double auction markets abstract this paper reports 14 laboratory experiments that examine existing theories of the price formation process in the continuous double auction the experiments feature random values and costs and therefore a new price formation observation each period we find that efficiency is high and rises with experience in this environment we also find that trades with greater exchange surplus tend to occur earlier in the period that increased trader experience reduces an anomalous intertemporal arbitrage opportunity observed previously and that only when traders are very experienced does exchange surplus accrue disproportionately to the side of the market with a smaller number of traders

double auction dynamics structural effects of non binding price controls in competitive equilibrium non binding price controls that is price floors below and ceilings above the equilibrium should not affect market outcomes but in laboratory experiments they do we build a simple dynamic model of double auction markets with zero intelligence zi computer traders that accounts for many though not all of the discrepancies between the data and the walrasian tatonnement predictions the success of the model in organizing the data and in isolating various consequences of price controls shows that the simple zi model is a powerful tool to gain insights into the dynamics of market institutions

beyond microfoundations towards a not too rational macroeconomics at ucla we are establishing a center for computable economics i have been very much involved in this effort this may surprise you that a non mathematical macro monetary economist should become an enthusiast for this project is one of those things that do not compute but then as i will explain we take a special interest in things that do not compute one may come to computable economics by many intellectual routes i will trace my own not because it makes a particularly edifying story but because it will tell you what kind of problems i hope we can make progress on by developing the field of computable economics but before we get to that i had better explain what i mean by computable economics

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

price formation in double auctions abstract we develop a model of information processing and strategy choice for participants in a double auction sellers in this model form beliefs that an offer will be accepted by some buyer similarly buyers form beliefs that a bid will be accepted these beliefs are formed on the basis of observed market data including frequencies of asks bids accepted asks and accepted bids then traders choose an action that maximizes their own expected surplus the trading activity resulting from these beliefs and strategies is sufficient to achieve transaction prices at competitive equilibrium and complete market efficiency after several periods of trading journal of economic literatureclassification numbers d41 d44 d8

time irreversibility and business cycle asymmetry the problem of business cycle symmetry is addressed within the context of time reversibility to this effect the authors introduce a time domain test of time reversibility the tr test in an application they show that time irreversibility is the rule rather than the exception for two well known representative macroeconomic data sets this shows that many components of the business cycle have asymmetric fluctuations the characterization of asymmetry provided by the tr test shows that many series exhibit steepness asymmetry a few series appear to be either deep or sharp copyright 1996 by ohio state university press

threshold cointegration and purchasing power parity in the pacific nations the paper uses a threshold cointegration methodology to explore the properties of long run purchasing power parity ppp in the pacific nations using japan and the usa as base countries it is shown that long run ppp holds for most asian countries but that the adjustment mechanism is asymmetric in contrast to symmetric error correction models it is found that asymmetric adjustments of nominal exchange rates play an important role in eliminating deviations from long run ppp

real exchange rate behavior in the middle east a re examination abstract this letter extends recent work by bahmani oskooee bahmani oskooee m do exchange rates follow a random walk process in middle eastern countries economics letters 1998 58 339 344 on testing long run purchasing power parity for middle eastern countries during the post bretton woods period using multivariate nonlinear models strong support is provided for highly nonlinear reversion of real exchange rates toward a stable equilibrium for each country examined

allocative efficiency of markets with zero intelligence traders market as a partial substitute for individual rationality we report market experiments in which human traders are replaced by zero intelligence programs that submit random bids and offers imposing a budget constraint i e not permitting traders to sell below their costs or buy above their values is sufficient to raise the allocative efficiency of these auctions close to 100 percent allocative efficiency of a double auction derives largely from its structure independent of traders motivation intelligence or learning adam smith s invisible hand may be more powerful than some may have thought it can generate aggregate rationality not only from individual rationality but also from individual irrationality

bayesian equilibrium in double auctions populated by biased heuristic traders abstract we use computer simulation to examine three asset markets with imperfect information in processing imperfect information traders in the three markets are bayesian empirical bayesian and heuristic representativeness and anchor and adjust respectively all three converge to the same bayesian equilibrium although the latter two converge more slowly without profit maximization natural selection arbitrage or mutual cancellation of random actions the results support becker 1962 and simon 1973 in that the rationality of the market emerges as a consequence of the market structure and not from the rationality of individuals

papers in experimental economics on nonbinding price controls in a competitive market interest in the effect of nonbinding price controls on double auction markets stems from two primary considerations the double auction institution converges to a competitive allocation more rapidly and with fewer participating agents than any other institution with which it has been compared see smith et al one way to improve our understanding of this important property is to determine what conditions if any can interfere with or retard this convergence process nonbinding price controls represent a condition that may affect this convergence process hence if such effects can be documented they will provide a body of data that any future proposed model of the double auction process should be able to explain a second reason for studying the effect of nonbinding controls on the double auction is practical the organized commodity exchanges often set limits on price fluctuations during any single day when prices at any point during a day rise above qr fall below the closing prices of the preceding day by more than the amount of the limit no further trading for that day is permitted walter labys p 162 consequently commodity trading frequently occurs at prices near the level of nonbinding price floors or ceilings mark issac and charles plott report the results of twelve exploratory experiments in which various price control constraints are imposed on double auction markets their two principal conclusions can be summarized as follows 1 the hypothesis is rejected that nonbinding price controls that is price ceilings above or price floors below the competitive equilibrium ce will serve as a focal point or signalling price on which sellers and buyers will key their contracts 2 inconclusive evidence is presented in support of the hypothesis that nonbinding controls near the ce will bias prices below ce when there is a price ceiling and above ce when there is a price floor support for this second hypothesis is not conclusive because some experimental markets show a tendency to converge from below and others from above depending upon the relative bargaining strength of buyers as against sellers thus sampling variation among subjects can yield a group in which buyers sellers are able to make contracts at an average price below above ce for several periods of trading consequently in an experiment in which there is a price ceiling floor five cents above below ce and in which contract prices are observed to occur below above ce one cannot determine conclusively whether the observed effect was due to the nonbinding price control or to the bargaining characteristics of the market participants we report below an experimental design developed for the purpose of separating these confounding factors and allowing the effect of nonbinding controls to be isolated the results of sixteen experiments strongly support the hypothesis that markets with a nonbinding price ceiling floor near ce will converge from below above relative to any otherwise identifiable tendency to converge from below above an analysis of the effect of a nonbinding price ceiling floor on the distributions of bids and offers reveals the cause of this bias ceilings limit the bargaining strategies of sellers especially but also that of buyers while floors have the opposite effect thus in the absence of price controls double auction trading is characterized by a process in which sellers typically make concessions from offer prices well above ce while buyers most often concede from bid prices well below ce a price ceiling truncates seller offer prices at the ceiling requir university of arizona and indiana university respectively research support by the national science foundation is gratefully acknowledged

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound