Bubble Formation and (In)Efficient Markets in Learning‐To‐Forecast and Optimise Experiments

29 Pages Posted: 25 Oct 2017

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: October 2017

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 three times larger than the fundamental value, which were not seen in former experiments.

Suggested Citation

Bao, Te and Hommes, Cars H. and Makarewicz, Tomasz, Bubble Formation and (In)Efficient Markets in Learning‐To‐Forecast and Optimise Experiments (October 2017). The Economic Journal, Vol. 127, Issue 605, pp. F581-F609, 2017. Available at SSRN: https://ssrn.com/abstract=3058398 or http://dx.doi.org/10.1111/ecoj.12341

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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