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

speculative investor behavior and learning as traders learn about the true distribution of some asset s dividends a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred small differences in prior beliefs lead to large speculative premiums during the learning process this phenomenon helps explain a paradox concerning the pricing of initial public offerings the result casts light on the significance of the common prior assumption in economic models

risk aversion in a dynamic asset allocation experiment we conduct a controlled laboratory experiment in the spirit of merton 1971 in which subjects dynamically choose their portfolio allocation between a risk free and risky asset using the optimal allocation of an investor with hyperbolic absolute risk aversion hara utility we fit the experimental choices to characterize the risk profile of our participants despite substantial heterogeneity decreasing absolute risk aversion and increasing relative risk aversion are the predominant types we also find some evidence of increased risk taking after a gain finally the session level risk attitudes show a different profile than the individual descriptions of risk attitudes

bubbles crashes and endogenous uncertainty in linked asset and product markets in laboratory asset markets subjects trade shares of a firm whose profits in a linked product market determine dividends treatments vary whether dividend information is revealed once per period or in real time and whether the firm is controlled by a profit maximizing robot or human subject the latter variation induces uncertainty about firm behavior bridging the gap between laboratory and field markets our data replicate well known features of laboratory asset markets e g bubbles suggesting these are robust to a market based dividend process compared to a sample of previous experiments both real time information revelation and endogenous uncertainty impede the bubble mitigating impact of experience

short sale constraints divergence of opinion and asset values evidence from the laboratory the overvaluation hypothesis miller 1977 predicts that a stocks are overvalued when there are short selling restrictions and that b the overvaluation is increasing in the degree of divergence of opinion we design an experiment that allows us to test these predictions in the laboratory our results support the hypothesis that prices are higher in the presence of short selling constraints the overvaluation does not depend on the degree of divergence of opinion

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

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

bubble formation and in efficient markets in learning to forecast and optimise experiments this experiment compares the price dynamics and bubble formation in an asset market with a price adjustment rule in three treatments where subjects 1 submit a price forecast only 2 choose quantity to buy sell and 3 perform both tasks we find deviation of the market price from the fundamental price in all treatments but to a larger degree in treatments 2 and 3 mispricing is therefore a robust finding in markets with positive expectation feedback some very large recurring bubbles arise where the price is three times larger than the fundamental value which were not seen in former experiments

opportunity costs in buying and short selling do they really matter abstract the experimental results of the paper reveal that people do not take into consideration opportunity costs or opportunity profits when buying and short selling lottery tickets these results are inconsistent with basic economic and finance theories

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

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

cooperative investments induced by contract law lecture on the first sfb tr 15 meeting gummersbach july 18 20 2004this paper revisits the economic analysis of contract law for a setting of cooperative investments while che and chung 1999 have shown that expectation damages perform rather poorly the present paper argues that this negative result follows from their impicit assumption of unilateral expectation damages yet the very nature of cooperative investments gives rise to the possibility that both parties may claim expectation damages it is shown that such a regime of bilateral expectation damages provides the incentives for the first best solution even in a framework of binary choice where for selfish investments the traditional overreliance result would hold

the impact of monetary policy on stock market bubbles and trading behavior evidence from the lab we investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets we introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of smith et al 1988 treatment groups face a variable interest rate policy which depends on asset prices while control groups are subjected to a constant interest rate we observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles however we find that announcing the possibility of reserve requirements significantly reduces bubbles

the chinese warrants bubble in 2005 2008 over a dozen put warrants traded in china went so deep out of the money that they were almost certain to expire worthless nonetheless each warrant was traded more than three times each day at substantially inflated prices this bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities this sample allows us to examine a set of bubble theories in particular our analysis highlights the joint effects of short sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature jel g12 g13 o16 p34

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

experience and confidence in an internet based asset market experiment the experience effect in asset markets is one that was thought to be settled as subjects gained experience with the interface and each other they typically exhibit fewer instances of mispricing and at lower magnitudes but questions regarding trading experience are not easy to address in the lab with the typical subject pool since the kind of experience one can typically generate in the lab is experience with the experimental environment itself not with external environments however in virtual worlds asset markets are highly evolved providing a subject pool with skilled and experienced traders that can be accessed via the internet this study compares experimental asset markets with participants recruited from virtual world trading groups to experimental markets with participants recruited from the virtual world at large i further examine trader performance and trading behavior within markets the findings indicate that asset markets with virtual world participants recruited from trading groups are more prone to exhibit bubbles than are markets with virtual world participants recruited at large within condition experienced traders are less likely to follow fundamentals and more likely to engage in strategies that result in loss of earnings excess confidence is rejected as an explanation for this pattern as confidence is found to be related to higher earnings and fundamental value trading strategies

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

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

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

collateral constraints and the law of one price an experiment we test the asset pricing implications of collateralized borrowing that is of using assets as collateral to borrow money in the laboratory to this purpose we develop a general equilibrium model with collateral constraints amenable to laboratory implementation and gather experimental data in the laboratory assets that can be leveraged fetch higher prices than assets that cannot even though assets payoffs are identical in all states of the world collateral value therefore creates deviations from the law of one price the spread between collateralizeable and noncollateralizeable assets is significant and quantitatively close to theoretical predictions

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

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

earnings metrics information processing and price efficiency in laboratory markets an enduring issue in financial reporting is whether and how salient summary measures of firm performance earnings metrics affect market price efficiency in laboratory markets we test the effects of salient earnings metrics which vary in how they combine persistent and transitory elements on investor information search beliefs about value offers to trade and market price efficiency we find that including transitory elements in salient earnings metrics causes traders to search unnecessarily for further information about these elements and to overestimate their effect on fundamental value relative to a rational benchmark in contrast separately displaying persistent elements in earnings increases the accuracy of traders value estimates prices generally reflect traders beliefs about value and prices are most efficient when transitory elements are excluded from earnings metrics entirely our study contributes to research on salience effects in financial reporting by showing that including transitory elements in salient earnings metrics causes inefficient information search and biased beliefs about value that can aggregate to affect market prices we also contribute to research in experimental markets by showing that redundant disclosure is not always beneficial redundant disclosure of transitory earnings elements in particular appears to have negative consequences for investor behavior and market efficiency

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

option values and bargaining delays abstract we consider a version of rubinstein bargaining in which both parties possess symmetric information about an asset s value but the value may change over time when players can wait to learn new information before responding to a given offer each offer carries an implicit option value when the players are patient it is optimal for them to make conservative offers to minimize the option value but such offers are rejected when the value of the asset increases multiple equilibrium outcomes also support the construction of further equilibria in which the players wait many periods before making a serious offer unlike other complete information models waiting in our model is built from stationary asymmetric equilibria in a limiting case waiting can become arbitrarily long and the payoffs arbitrarily small journal of economic literature classification number 026

asset holdings caps and bubbles in experimental asset markets abstract we report the results of an experiment designed to study the effect of individual asset holdings restrictions on the formation of bubbles and crashes in laboratory asset markets bubbles and crashes are a quite robust phenomenon in experimental settings motivated by demand control policies employed in the chinese real estate market we explore the effects of permanent and short term caps on individual asset holdings we find that permanent caps greatly reduce positive bubbles but tend to generate negative bubbles in later periods under short term caps on the other hand neither positive nor negative bubbles are observed our results indicate that asset holdings caps can be effective in eliminating bubbles if properly designed

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

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

experimental evidence on varying uncertainty and skewness in laboratory double auction markets abstract we investigate the influence of skewness in asset fundamentals on asset prices under different states of uncertainty in double auction markets three different types of assets are considered risky assets ambiguous assets and assets where the fundamental value distribution can be learned by repeated sampling of realizations we show that market prices for skewed assets initially differ from those of non skewed assets for risky as well as for ambiguous assets because of learning the difference in market prices mostly disappears towards the end of trading when fundamentals are learned by experience sampling prices of all assets irrespective of skewness are very efficient from the beginning thus when probabilities are not described but experienced subjects are better able to estimate the fundamental value of an asset

short selling and the wta wtp gap abstract the experimental results of the current paper reveal positive relations between short selling bidding prices and the wta wtp gap this result may be explained by the status quo bias

do option like incentives induce overvaluation evidence from experimental asset markets abstract one potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option like incentive schemes in financial institutions by running laboratory asset markets we investigate the impact of option like incentives on price formation and trading behavior the main results are that i we observe significantly higher market prices with option like incentives than linear incentives ii we further find that option like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives iii we finally show that trading at inflated prices is rational for subjects with option like incentives since it increases their expected payout

indeterminacy of equilibria in a hyperinflationary world experimental evidence the authors design and study an olg experimental economy where the government finances a fixed real deficit through seigniorage the economy has continua of nonstationary rational expectations equilibria and two stationary rational expectations equilibria the authors do not observe nonstationary rational expectations paths observed paths tend to converge close to or somewhat below the low inflation stationary state the adaptive learning hypothesis is consistent with the data in selecting the low inflation stationary state rational expectations equilibrium as a long run stationary equilibrium nevertheless simple adaptive learning models do not capture the market uncertainty or the biases observed in the data copyright 1993 by the econometric society

price and volume effects associated with changes in the s p 500 list new evidence for the existence of price pressures attempts to identify price pressures caused by large transactions may be inconclusive if the transactions convey new information to the market this problem is addressed in an examination of prices and volume surrounding changes in the composition of the s p 500 since these changes cause some investors to adjust their holdings of the affected securities and since it is unlikely that the changes convey information about the future prospects of these securities they provide an excellent opportunity to study price pressures the results are consistent with the price pressure hypothesis immediately after an addition is announced prices increase by more than 3 percent this increase is nearly fully reversed after 2 weeks the efficient market hypothesis emh predicts that security prices reflect all publicly available information therefore one corollary of the emh is that you can sell or buy large blocks of stock at close to the market price as long as you can convince other investors that you have no private information 1 this statement assumes that securities are near perfect substitutes for each other if so the excess demand for a single security will be very elastic and the sale or purchase of a large number of shares will have no impact on price in contrast to the emh scholes 8 kraus and stoll 5 hess and frost 4 and others propose two hypotheses which predict that a large stock sale purchase will cause the price to decrease increase even if no new information is associated with the transaction the imperfect substitutes hypothesis ish also known as the distribution effect hypothesis assumes that securities are not close substitutes for each other and hence that long term demand is less than perfectly elastic under this hypothesis equilibrium prices change when demand curves shift to eliminate excess demand price reversals are not expected because the new price reflects a new equilibrium distribution of security holders the price pressure hypothesis pph assumes that investors who accommodate demand shifts must be compensated for the transaction costs and portfolio risks that they bear when they agree to immediately buy or sell securities which they otherwise would not trade these passive suppliers of liquidity are attracted by immediate price drops rises associated with large sales purchases they are compensated for their liquidity service when prices rise drop to their fullinformation levels the pph like the emh assumes that long run demand is

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

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

do demand curves for stocks slope down since september 1976 stocks newly included into the standard and poor s 500 index have earned a significant positive abnormal return at the announcement of the inclusion this return does not disappear for at least ten days after the inclusion the returns are positively related to measures of buying by index funds consistent with the hypothesis that demand curves for stocks slope down the returns are not related to s p s bond ratings which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock

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

options short sales and market completeness this paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales the significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling we also find significant effects on option prices related to the short interest in the underlying stock we then present evidence that options also increase information efficiency earlier work that is replicated and extended here has suggested that short sale constraints cause stock prices to underweight negative information options appear to reduce that effect

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

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

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

evaluation periods and asset prices in a market experiment we test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change it influence her risk attitude in markets in line with the prediction of myopic loss aversion benartzi and thaler 1995 we find that more information and more flexibility result in less risk taking market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced this result supports the findings from individual decision making and shows that markets do not eliminate such behavior

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