Asset Price Volatility and Investment Horizons: An Experimental Investigation

65 Pages Posted: 5 Oct 2020

See all articles by Mikhail Anufriev

Mikhail Anufriev

University of Technology Sydney (UTS)

Aleksei Chernulich

New York University (NYU) - New York University Abu Dhabi

Jan Tuinstra

University of Amsterdam - Faculty of Economics and Business (FEB)

Date Written: August 17, 2020

Abstract

We study the effects of the investment horizon on asset price volatility using a Learning to Forecast experiment. We end that, for short investment horizons, participants coordinate on self-fulfilling trend extrapolating predictions. Price deviations are then reinforced and amplified, possibly leading to large bubbles and crashes in asset prices. For longer investment horizons such bubbles do not emerge and price volatility tends to be lower. This is due to the fact that, for longer horizons, there is more dispersion in participants' forecasts, and participants extrapolate trends in past prices to a lesser extent. We also show that, independent of the investment horizon, if the initial history of asset prices is already relatively stable before participants start their prediction task, price volatility remains small, with prices close to their fundamental values for the duration of the experiment.

Keywords: Experimental Economics, Expectations, Asset Pricing, Investment Horizons, Behavioral Finance

JEL Classification: C91, G12, G14, G41

Suggested Citation

Anufriev, Mikhail and Chernulich, Aleksei and Tuinstra, Jan, Asset Price Volatility and Investment Horizons: An Experimental Investigation (August 17, 2020). Available at SSRN: https://ssrn.com/abstract=3676023 or http://dx.doi.org/10.2139/ssrn.3676023

Mikhail Anufriev (Contact Author)

University of Technology Sydney (UTS) ( email )

P. O. Box 123
Broadway, NSW 2007
Australia

Aleksei Chernulich

New York University (NYU) - New York University Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Jan Tuinstra

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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