Bubble Formation and (In)Efficient Markets in Learning-to-Forecast and -Optimise Experiments

Economic Journal, Forthcoming

Tinbergen Institute Discussion Paper 15-107/II

55 Pages Posted: 8 Sep 2015

See all articles by Te Bao

Te Bao

Nanyang Technological University (NTU) - Division of Economics; University of Amsterdam - CeNDEF

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Tomasz Makarewicz

University of Bamberg

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2015

Abstract

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

Suggested Citation

Bao, Te and Hommes, Cars H. and Makarewicz, Tomasz, Bubble Formation and (In)Efficient Markets in Learning-to-Forecast and -Optimise Experiments (September 7, 2015). Economic Journal, Forthcoming; Tinbergen Institute Discussion Paper 15-107/II. Available at SSRN: https://ssrn.com/abstract=2657057 or http://dx.doi.org/10.2139/ssrn.2657057

Te Bao (Contact Author)

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Tomasz Makarewicz

University of Bamberg ( email )

Kirschaeckerstrasse 39
Bamberg, 96045
Germany

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