Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets

Posted: 20 Jun 2007

See all articles by Shyam Sunder

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Shinichi Hirota

Waseda University - Graduate School of Commerce

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Abstract

We experimentally explore how investor decision horizons influence the formation of stock prices. We find that in long-horizon sessions, where investors collect dividends till maturity, prices converge to the fundamental levels derived from dividends through backward induction. In short-horizon sessions, where investors exit the market by receiving the price (not dividends), price levels and paths become indeterminate and lose dividend anchors; investors tend to form their expectations of future prices by forward, not backward, induction. These laboratory results suggest that investors' short horizons and the consequent difficulty of backward induction are important contributors to the emergence of price bubbles.

Keywords: Stock price bubbles, Short-term investors, Backward induction, Market experiments

JEL Classification: G12, C91

Suggested Citation

Sunder, Shyam and Hirota, Shinichi, Price Bubbles Sans Dividend Anchors: Evidence from Laboratory Stock Markets. Journal of Economic Dynamics and Control, Vol. 31, No. 6, 2007. Available at SSRN: https://ssrn.com/abstract=994376

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

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)

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