Bubble Formation and (In)Efficient Markets in Learning-to-Forecast and -Optimise Experiments
Economic Journal, Forthcoming
55 Pages Posted: 8 Sep 2015
Date Written: September 7, 2015
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 3 times larger than the fundamental value, which were not seen in former experiments.
Keywords: Financial Bubbles, Experimental Finance, Rational Expectations, Learning to Forecast, Learning to Optimize
JEL Classification: C91, C92, D53, D83, D84
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