Bubbles in Experimental Asset Markets: Irrational Exuberance No More

40 Pages Posted: 13 Oct 2001

See all articles by Lucy F. Ackert

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business

Narat Charupat

McMaster University - DeGroote School of Business

Bryan K. Church

Georgia Institute of Technology - Accounting Area

Richard Deaves

McMaster University - Michael G. DeGroote School of Business; Center for European Economic Research (ZEW)

Date Written: December 2002

Abstract

The robustness of bubbles and crashes in markets for finitely lived assets is perplexing. This paper reports the results of experimental asset markets in which participants trade two assets. In some markets, price bubbles form. In these markets, traders will pay even higher prices for the asset with lottery characteristics, i.e., a claim on a large, unlikely payoff. However, institutional design has a significant impact on deviations in prices from fundamental values, particularly for an asset with lottery characteristics. Price run-ups and crashes are moderated when traders finance purchases of the assets themselves and are allowed to short sell.

Keywords: bubbles, asset markets, laboratory experiments, rational expectations

JEL Classification: C92, G14

Suggested Citation

Ackert, Lucy F. and Charupat, Narat and Church, Bryan K. and Deaves, Richard, Bubbles in Experimental Asset Markets: Irrational Exuberance No More (December 2002). Federal Reserve Bank of Atlanta Working Paper 2002-24. Available at SSRN: https://ssrn.com/abstract=287097 or http://dx.doi.org/10.2139/ssrn.287097

Lucy F. Ackert (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Narat Charupat

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 ext. 23987 (Phone)

Bryan K. Church

Georgia Institute of Technology - Accounting Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-3907 (Phone)
404-894-6030 (Fax)

Richard Deaves

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-522-3976 (Phone)

Center for European Economic Research (ZEW)

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

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