On Booms That Never Bust: Ambiguity in Experimental Asset Markets with Bubbles

GATE WP No. 1825 – October 2018

40 Pages Posted: 10 Nov 2018

See all articles by Brice Corgnet

Brice Corgnet

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Roberto Hernán-González

Burgundy School of Business

Praveen Kujal

Middlesex University

Date Written: October 18, 2018

Abstract

We study the effect of ambiguity on the formation of bubbles and on the occurrence of crashes in experimental asset markets à la Smith, Suchanek, and Williams (1988). We extend their framework to an environment where the fundamental value of the asset is ambiguous. We show that, when the fundamental value is ambiguous, asset prices tend to be lower than when it is risky although bubbles form in both the ambiguous and the risky environments. Additionally, bubbles do not crash in the ambiguous case whereas they do so in the risky one. These findings regarding depressed prices and the absence of crashes in the presence of ambiguity are in line with recent theoretical work stressing the crucial role of ambiguity to account for surprisingly low equity prices (high returns) as well as herding in asset markets.

Keywords: experimental asset markets, bubbles, ambiguity

JEL Classification: C92, D84, G14, G41

Suggested Citation

Corgnet, Brice and Hernán-González, Roberto and Kujal, Praveen, On Booms That Never Bust: Ambiguity in Experimental Asset Markets with Bubbles (October 18, 2018). GATE WP No. 1825 – October 2018 , Available at SSRN: https://ssrn.com/abstract=3269272

Brice Corgnet (Contact Author)

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE) ( email )

Lyon
France

Roberto Hernán-González

Burgundy School of Business ( email )

29 Rue Sambin
Dijon, 21000
France

Praveen Kujal

Middlesex University ( email )

The Burroughs
London, NW4 4BT
United Kingdom

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