Coordination of Expectations in Asset Pricing Experiments

Tinbergen Institute Discussion Paper No. 2003-010/1

36 Pages Posted: 19 May 2003

See all articles by Cars H. Hommes

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE); Tinbergen Institute

Henk van de Velden

University of Amsterdam - Amsterdam School of Economics (ASE)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2003

Abstract

We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand of the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from individual expectations. Each market is populated by six subjects and a small fraction of fundamentalist traders. Realized prices differ significantly from fundamental values. In some groups the asset price converges slowly to the fundamental price, in other groups there are regular oscillations around the fundamental price. Participants coordinate on a common prediction strategy. The individual prediction strategies can be estimated and correspond, for a large majority of participants, to simple linear autoregressive forecasting rules.

Keywords: experimental economics, expectations, asset pricing, coordination

JEL Classification: C91, C92, D84, G12, G14

Suggested Citation

Hommes, Cars H. and Sonnemans, Joep and Tuinstra, Jan and van de Velden, Henk, Coordination of Expectations in Asset Pricing Experiments (January 2003). Tinbergen Institute Discussion Paper No. 2003-010/1. Available at SSRN: https://ssrn.com/abstract=384780 or http://dx.doi.org/10.2139/ssrn.384780

Cars H. Hommes

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

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Joep Sonnemans (Contact Author)

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)

Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Henk Van de Velden

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

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

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