Speculation and Price Indeterminacy in Financial Markets: An Experimental Study

74 Pages Posted: 7 Jun 2018

See all articles by Shinichi Hirota

Shinichi Hirota

Waseda University - Graduate School of Commerce

Juergen Huber

University of Innsbruck; University of Vienna - Department of Finance

Thomas Stockl

Management Center Innsbruck (MCI)

Shyam Sunder

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

Date Written: May 31, 2018

Abstract

To explore how speculative trading influences prices in financial markets we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) as well as dividend-collecting investors. We find that in markets with only speculating investors (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) the “mispricing” is likely to be strategic and not irrational; (iv) mispricing increases with the number of transfers until maturity; and (v) speculative trading pushes prices upward (downward) when liquidity is high (low).

Keywords: Experimental finance, Speculation, Rational expectations, Price efficiency, Price bubbles, Overlapping generations, Backward and forward induction

JEL Classification: C91, G11, G12

Suggested Citation

Hirota, Shinichi and Huber, Juergen and Stockl, Thomas and Sunder, Shyam, Speculation and Price Indeterminacy in Financial Markets: An Experimental Study (May 31, 2018). Cowles Foundation Discussion Paper No. 2134. Available at SSRN: https://ssrn.com/abstract=3188268 or http://dx.doi.org/10.2139/ssrn.3188268

Shinichi Hirota

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)

Juergen Huber

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

University of Vienna - Department of Finance ( email )

Bruenner Strasse 72
Vienna, 1210
Austria

Thomas Stockl

Management Center Innsbruck (MCI) ( email )

Universitaetsstr. 15
Innsbruck, 6020
Austria

Shyam Sunder (Contact Author)

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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