Does Volatility Matter? Expectations of Price Return and Variability in an Asset Pricing Experiment

44 Pages Posted: 17 Dec 2008 Last revised: 1 Apr 2009

See all articles by Giulio Bottazzi

Giulio Bottazzi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Giovanna Devetag

Luiss Guido Carli

Francesca Pancotto

Università degli studi di Modena e Reggio Emilia (UNIMORE)

Date Written: March 30, 2009

Abstract

We present results of an experiment on expectation formation in an asset market. Participants to 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.

Keywords: experimental economics, expectations, coordination, asset pricing

JEL Classification: C91, C92, D84, G12, G14

Suggested Citation

Bottazzi, Giulio and Devetag, Giovanna and Pancotto, Francesca, Does Volatility Matter? Expectations of Price Return and Variability in an Asset Pricing Experiment (March 30, 2009). Available at SSRN: https://ssrn.com/abstract=1317345 or http://dx.doi.org/10.2139/ssrn.1317345

Giulio Bottazzi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy
+39-050-883343 (Phone)
+39-050-883344 (Fax)

Giovanna Devetag

Luiss Guido Carli ( email )

Via Salvini 2
Roma, 00197
Italy

Francesca Pancotto (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) ( email )

Viale A. Allegri 9
Modena, Modena 42121
Italy

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