Speculation and Price Indeterminacy in Financial Markets: An Experimental Study

77 Pages Posted: 23 Apr 2020

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 17, 2020

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) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.

Keywords: Experimental finance, Speculation, Money supply, 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 (April 17, 2020). Cowles Foundation Discussion Paper No. 2134R, Available at SSRN: https://ssrn.com/abstract=3580846 or http://dx.doi.org/10.2139/ssrn.3580846

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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