Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values

CHARLES N. NOUSSAIR · Bernard Ruffieux

197 citations0/0 files storedExperimental Economics

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Economic theories and models Financial Markets and Investment Strategies Experimental Behavioral Economics Studies

Abstract

Abstract We construct asset markets that are similar to those studied by Smith, Suchanek and Williams (Econometrica. 56, 1119-1151) in which bubbles and crashes tended to occur. The main difference between the markets studied here and those studied by Smith et al. is that in the markets studied here, the fundamental value of the asset is constant over the entire life of the asset. In four of the eight sessions reported here, we observe bubbles, which are prices considerably higher than fundamental values. The data suggest that the frequent payment of dividends is a major cause of bubble formation. The property that the fundamental value remains constant over the course of the trading horizon is not sufficient to eliminate the possibility of a bubble.

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References

1988Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets 1991Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets 1994Economics in the Laboratory 2001Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality 1993Nonlinear dynamics and evolutionary economics 1993The Robustness of Bubbles and Crashes in Experimental Stock Markets 19956. Experimental Asset Markets: A Survey 1995Futures Contracting and Dividend Uncertainty in Experimental Asset Markets

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