Price Dynamics and Consumption Smoothing in Experimental Asset Markets

48 Pages Posted: 30 May 2016

See all articles by Edward Halim

Edward Halim

Nanyang Technological University (NTU)

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics

Nilanjan Roy

City University of Hong Kong

Date Written: May 27, 2016

Abstract

We report the results of an experiment designed to study the determinants of asset price movement and consumption smoothing behavior across asset markets populated with varying proportion of traders with and without having induced motive to smooth consumption. Although the asset is over-priced compared to the risk-neutral fundamental value in all sessions, the extent of over-pricing and magnitude of price movement is significantly higher when traders with no induced motive to trade are present. We also find that the price of the asset co-moves with the dividend state, with price predictability being higher in the presence of traders with induced motive to smooth consumption. Participants motivated to minimize consumption fluctuations are able to do so with the inclination being more for those having lower initial endowment. With fixed prices, traders are able to smooth consumption not only over periods but also over the dividend states.

Keywords: Asset Markets, Uncertainty, Experimental Economics, Price Predictability, Consumption Smoothing

JEL Classification: C91, C92, D84, D91, G12

Suggested Citation

Halim, Edward and Riyanto, Yohanes E. and Roy, Nilanjan, Price Dynamics and Consumption Smoothing in Experimental Asset Markets (May 27, 2016). Available at SSRN: https://ssrn.com/abstract=2785476 or http://dx.doi.org/10.2139/ssrn.2785476

Edward Halim

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Yohanes E. Riyanto

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

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

Nilanjan Roy (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/econnr86/

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