Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets

55 Pages Posted: 25 Nov 2002

See all articles by Shinichi Hirota

Shinichi Hirota

Waseda University - Graduate School of Commerce

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

We experimentally explore how investor decision horizons influence the formation of stock prices. We find that in long-horizon sessions, where investors collect dividends till maturity, prices converge to the fundamental levels derived from dividends through backward induction. In short-horizon sessions, where investors exit the market by receiving the price (not dividends), prices levels and paths become indeterminate and lose dividend anchors; investors tend to form their expectations of future prices by forward, not backward, induction. These laboratory results suggest that investors' short horizons and the consequent difficulty of backward induction are important contributors to the emergence of price bubbles.

Keywords: stock price bubbles, short-term investors, backward induction, market experiments

JEL Classification: G12, C91

Suggested Citation

Hirota, Shinichi and Sunder, Shyam, Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets (November 2006). Yale ICF Working Paper No. 02-42; EFA 2003 Annual Conference Paper No. 119. Available at SSRN: https://ssrn.com/abstract=302393 or http://dx.doi.org/10.2139/ssrn.302393

Shinichi Hirota (Contact Author)

Waseda University - Graduate School of Commerce ( email )

1-6-1, Nishi-Waseda
Shinjuku-ku, Tokyo 169-8050
Japan
+81-3-5286-2088 (Phone)
+81-3203-7067 (Fax)

Shyam Sunder

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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