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

contestability in bus markets evidence from the british de regulated market following the 1985 transport act in great britain reforms in the provision of bus services continue across europe and other parts of the world to this day the british experience however remains a key point of study in informing these continuing developments this article looks at the issue of contestability in bus markets and tests for the existence of the contestable market in britain through an examination of fare levels profit margins and technical efficiencies in 90 identifiable bus markets the main conclusion is that there is evidence of the contestable market in britain however it can hardly be described as widespread only found to be present in 15 of the 90 markets identified in the sample the real issue however particularly with regard to continuing reforms elsewhere in europe is the ability of regulatory authorities to maintain competitive and contestable free markets and the research suggests that in the face of market forces this is simply not possible the only conclusion therefo

speculative prices and popular models t he rational expectations revolution in economics was born of the recognition that the expectations people hold for future economic variables are fundamental to their behavior thus our economists economic models require their those who make up the economy economic models models which they use to generate their expectations the key idea of rational expectations models is to collapse the two models into one to assume that people know or behave as if they know the true model that describes the economy this idea allows economists to construct simple and elegant models of the economy models that are appealing theoretically and that can be studied without collecting any data about the models in the minds of economic actors the problem with the rational expectations models is that collapsing the two kinds of models into one is a gross oversimplification obviously the popular models the models that are used by the broad masses of economic actors to form their expectations are not the same as those held by economists once one accepts the difference economic modelling cannot proceed without collecting data on the popular models themselves this paper reports on such a data collection effort on popular models using questionnaire survey methods with the purpose of understanding speculative markets i will report here on my research to understand the u s stock market crash of october 1987 research fumiko konya yoshiro tsutsui and i undertook to understand the japanese stock market crash of october 1987 research karl case and i undertook to understand recent real estate booms and research john pound and i undertook to understand the periodic hot markets for initial public offerings ipo s of common stock

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

the impact on technical efficiency of the uk privatization programme the level of technical efficiency in nine organizations privatized in the uk in the 1980s is assessed technical efficiency is measured for a number of years before and after privatization using data envelopment analysis this non parametric method allows efficiency to be measured without having to specify either the form of the production function or the weights for the different inputs and outputs used nevertheless inputs and outputs have to be specified and some assumption has to be made about production conditions consequently three models are estimated the first assumes constant returns to scale the second allows for variable returns and the third adds environmental variables for technological change and the business cycle to the input output set the nine organizations studied yield mixed results in some cases there is clear evidence of an improvement in technical efficiency in others there is no discernible impact of ownership on performance

using survey data to test standard propositions regarding exchange rate expectations survey data provide a measure of exchange rate expectations superior to the forward rate in that no risk premium interferes we estimate extrapolative adaptive and regressive models of expectations static or random walk expectations and bandwagon expectations are rejected current appreciation generates the expectation of future depreciation because variables other than the contemporaneous spot rate receive weight in comparing expectations to the process governing the spot rate we find statistically significant bias no variable is as ubiquitous in international financial theory and yet as elusive empirically as investors expectations regarding exchange rates in the past expectations have been modeled in an ad hoc way often by using the forward exchange rate there is however a serious problem with using the forward discount as the measure of the expected change in the exchange rate in that the two may not be equal the gap that may separate the forward discount and expected depreciation is generally interpreted as a risk premium most of the large empirical literature testing the unbiasedness of the forward exchange rate for example has found it necessary either arbitrarily to assume away the existence of the risk premium if the aim

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

expectations and bubbles in asset pricing experiments abstract we present results on expectation formation in a controlled experimental environment in each period subjects are asked to predict the next price of a risky asset the realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts in most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously these bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or positive feedback expectations of the participants we also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy

determinacy and expectational stability of equilibrium in a monetary sticky price model with taylor rule abstract recent studies show that the taylor rule possesses desirable properties in terms of generating determinacy and e stability of rational expectations equilibria under sticky prices this paper examines whether this policy rule retains these properties within a discrete time money in utility function model employing three timings of money balances of the utility function that the existing literature contains end of period timing and two types of cash in advance timing this paper shows i even a small degree of non separability of the utility function between consumption and real balances causes the taylor rule to be much more likely to induce indeterminacy or e instability if this rule responds not only to inflation but also to output or the output gap ii differences among the three timings strongly alter conditions for the taylor rule to ensure both determinacy and e stability

trend growth and learning about monetary policy rules abstract the paper examines the effect of trend productivity growth on the determinacy and learnability of equilibria under alternative monetary policy rules under zero trend inflation we show that the economic structure is isomorphic to that of bullard and mitra 2002 and show that under a policy rule that responds to current period inflation and output a higher trend growth rate relaxes the conditions for determinacy and learnability results are mixed for other policy rules under the expectations based rule trend growth tightens the conditions for determinacy but it relaxes the conditions for learnability under the lagged data based rule trend growth tightens the conditions for determinacy and learnability our analysis shows that lower higher trend growth has similar effects as higher lower trend inflation in the sense of making inflation more less forward looking thus our results complement previous studies on the role of high trend inflation as a cause of macroeconomic volatility in the u s in the 1970s as this period was also characterized by productivity growth slowdown

contestable markets an uprising in the theory of industry structure presents a transcript of the presidential address delivered at the 94th meeting of the american economic association on december 29 1981 discussion of developments in the theory of industry structure welfare attributes of contestable markets behavior characteristics of oligopoly equilibrium intertemporal vulnerability to inefficient entry ebsco

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

coordination on bubbles in large group asset pricing experiments abstract we present a large group experiment in which participants predict the price of an asset whose realization depends on the aggregation of individual forecasts the markets consist of 21 to 32 participants a group size larger than in most experiments multiple large price bubbles occur in six out of seven markets the bubbles emerge even faster than in smaller markets individual forecast errors do not cancel out at the aggregate level but participants coordinate on a trend following prediction strategy that gives rise to large bubbles the observed price patterns can be captured by a behavioral heuristics switching model with heterogeneous expectations

fat tails and volatility clustering in experimental asset markets abstract this paper presents results from experimental asset markets with asymmetric fundamental information we observe leptokurtic returns and a slowly decaying autocorrelation function of absolute returns in contrast to results from heterogeneous agent models hams we find that noise has no significant influence on the emergence of fat tails instead we observe a significantly positive relationship between the degree of heterogeneity of fundamental information and absolute returns which suggests that heterogeneous fundamental information is the source of fat tails with respect to volatility clustering we discover an intra periodical pattern where absolute returns decrease after the arrival of new asymmetric fundamental information

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

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

does volatility matter expectations of price return and variability in an asset pricing experiment abstract we present results of an experiment on expectation formation in an asset market participants in our experiment must provide forecasts of the stock future return to computerized utility maximizing investors and are rewarded according to how well their forecasts perform in the market in the baseline treatment participants must forecast the stock return one period ahead in the volatility treatment we also elicit subjective confidence intervals of forecasts which we take as a measure of perceived volatility the realized asset price is derived from a walrasian market equilibrium equation with non linear feedback from individual forecasts our experimental markets exhibit high volatility fat tails and other properties typical of real financial data eliciting confidence intervals for predictions has the effect of reducing price fluctuations and increasing subjects coordination on a common prediction strategy

impact of input substitution and output transformation on data envelopment analysis decisions abstractdata envelopment analysis dea can aid managerial decision making because it offers an opportunity to measure organizational performance in a holistic manner aggregating data from partial indicators into a single comprehensive measure however there are some methodological hazards associated with the use of dea that are especially relevant to managerial decisions but which have been largely ignored in the literature herein we identify and show the impact of a ubiquitous methodological hazard in dea modelling the economic assumptions regarding input substitutions and output transformations