Bubbles, Crashes and Information Contagion in Large-Group Asset Market Experiments

Tinbergen Institute Discussion Paper 2019-016/II

46 Pages Posted: 13 Mar 2019

See all articles by Cars H. Hommes

Cars H. Hommes

Government of Canada - Bank of Canada; CeNDEF, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute

Anita Kopányi-Peuker

Radboud University Nijmegen - Department of Economics

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Date Written: February 15, 2019

Abstract

We study the emergence of bubbles in a laboratory experiment with large groups of individuals. The realized price is the aggregation of the forecasts of a group of individuals, with positive expectations feedback through speculative demand. When prices deviate from fundamental value, a random selection of participants receives news about overvaluation. Our findings are: (i) large asset bubbles occur in large groups, (ii) information contagion through news affects behaviour and may break the coordination on a bubble, (iii) time varying heterogeneity provides an accurate explanation of bubble formation and crashes, and (iv) bubbles are strongly amplified by coordination on trend-extrapolation.

Keywords: experimental finance, expectation formation, learning to forecast, financial bubbles

JEL Classification: C91, C92, D53, D83, D84

Suggested Citation

Hommes, Cars H. and Kopányi-Peuker, Anita and Sonnemans, Joep, Bubbles, Crashes and Information Contagion in Large-Group Asset Market Experiments (February 15, 2019). Tinbergen Institute Discussion Paper 2019-016/II, Available at SSRN: https://ssrn.com/abstract=3338905 or http://dx.doi.org/10.2139/ssrn.3338905

Cars H. Hommes (Contact Author)

Government of Canada - Bank of Canada ( email )

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Canada

CeNDEF, Amsterdam School of Economics, University of Amsterdam ( email )

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Amsterdam, NL-1018WB
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HOME PAGE: http://https://www.uva.nl/en/profile/h/o/c.h.hommes/c.h.hommes.html

Tinbergen Institute ( email )

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Rotterdam, 3062 PA
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Anita Kopányi-Peuker

Radboud University Nijmegen - Department of Economics ( email )

Nijmegen, 6500 HK
Netherlands

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

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