By Stefan Palan
This ebook describes a laboratory test designed to check the explanations and houses of bubbles in monetary markets and explores the query if it is attainable to layout markets which stay away from such bubbles and crashes. within the scan, topics got the chance to alternate in a inventory marketplace modeled after the seminal paintings of Smith et al. (1988). To account for the expanding value of on-line having a bet websites, topics have been additionally allowed to exchange in a electronic alternative marketplace. the results shed new gentle on how matters shape and replace their expectancies, putting certain emphasis at the bounded rationality of traders. numerous analytical bubble measures present in the literature are accumulated, calculated, categorized and awarded for the 1st time. The very attention-grabbing new bubble measures "Dispersion Ratio", "Overpriced Transactions" and "Underpriced Transactions" are built, making the booklet a huge step in the direction of the examine aim of forestalling bubbles and crashes in monetary markets. furthermore, the booklet formulates concrete new study hypotheses for destiny studies.
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Extra info for Bubbles and crashes in experimental asset markets
The payoff structure of the digital options employed in the empirical part of this study will be described in detail in Sect. 3. , when the option is at the money at maturity). 4 Literature on Experiments in Economics 33 This is not the case for digital options, which makes them primarily a vehicle for speculation. Because of this reason, it cannot be argued that subjects use digital options to improve their risk exposure, but only to improve their cash position. 41 Following this argument, a no-trade equilibrium in the digital option market relies on the following conditions:42 Condition 1: All subjects have homogeneous expectations.
In their book surveying the whole discipline of experimental economics, Davis and Holt finally drew the following conclusion regarding the value of experimentation as a research methodology in economics:27 “Overall, the advantages of experimentation are decisive. Experimental methods, however, complement rather than substitute for other empirical techniques. ” One can summarize the above deliberations by noting that the experimental method is one of a number of instruments in the economist’s toolbox.
Several studies documented the propensity of information traders not to trade on their information in traditional stock markets. 2 Literature on Information and Derivative Markets 19 and futures markets, since these markets offer larger absolute returns with lower capital investment than the markets for the respective underlying. The major findings from these studies are summarized in the following paragraphs. Manaster and Rendleman (1982) argued that in the long run, the instrument providing the greatest liquidity paired with the lowest trading costs and restrictions would be likely to play the predominant role in the market’s determination of equilibrium stock prices.