Bubble measures in experimental asset markets
- 992 Downloads
We review bubble measures which are commonly used in the experimental asset market literature. It seems sensible to require that measures of mispricing should (i) relate the fundamental value and price, (ii) be monotone in the difference between fundamental value and price, and (iii) be independent of the total number of periods and the absolute level of fundamental value. We show that none of the measures currently used fulfills all these criteria. To facilitate comparability across different experimental settings with different parameterizations we propose two alternative measures which fulfill all evaluation criteria. The measure for mispricing, RAD (relative absolute deviation), is calculated by averaging absolute differences between the (volume-weighted) mean price and the fundamental value across all periods and normalizing it with the absolute value of the average FV of the market. The measure for overvaluation, RD (relative deviation), is calculated analogously, but uses raw difference between (volume-weighted) mean prices and fundamental values. Hence, it provides information on whether the mispricing stems from over- or undervaluation of the asset.
KeywordsExperimental economics Asset market Bubble Bubble measure
JEL ClassificationC90 D84 G14
Unable to display preview. Download preview PDF.
- Blanchard, O. J., & Watson, M. W. (1982). Bubbles, rational expectations and financial markets. In H. M., Wachtel (Ed.) Crisis in the economic and financial structure (pp. 295–315). Lexington: Lexington Books. Google Scholar
- Brunnermeier, M. K. (2008). The new Palgrave dictionary of economics, Chap. Bubbles. Google Scholar
- Guenster, N., Kole, E., & Jacobsen, B. (2008). Riding bubbles. Electronic copy available at http://ssrn.com/abstract=1071670.
- Huber, J., Kirchler, M., & Stöckl, T. (2009). Trading regulations and market efficiency—experimental evidence from two different market models. Working paper. Google Scholar
- Kindleberger, C. P. (2000). Manias, panics, and crashes, a history of financial crises (4th edn). New York: Wiley. Google Scholar
- King, R., Smith, V., Williams, A., & Van Boening, M. (1993). The robustness of bubbles and crashes in experimental stock markets. In R. Day & P. Chen (Eds.), Nonlinear dynamics and evolutionary economics (pp. 183–200). New York: Oxford University Press. Google Scholar
- Kirchler, M., Huber, J., & Stöckl, T. (2009). Bubble or no bubble—the impact of market model on the formation of price bubbles in experimental asset markets. Working Paper available at: http://econpapers.repec.org/paper/innwpaper/2009-26.htm.
- Lei, V., Noussair, C. N., & Plott, C. R. (2002). Asset bubbles and rationality: additional evidence from capital gains tax experiments. Working paper. Google Scholar
- Noussair, C. N., & Powell, O. (2008). Peaks and valleys: experimental asset markets with non-monotonic fundamentals. Working paper. Google Scholar
- Noussair, C. N., Robin, S., & Ruffieux, B. (2001). Price bubbles in laboratory asset markets with constant fundamental values. Experimental Economics, 4, 87–105. Google Scholar
- Oechssler, J., Schmidt, C., & Schnedler, W. (2007). On the ingredients for buble formation: informed traders and communication. Working paper. Google Scholar
- Shiller, R. J. (2000). Irrational exuberance. Princeton: Princeton University Press. Google Scholar
- Sutter, M., Huber, J., & Kirchler, M. (2009). Bubbles and information: an experiment. Working paper. Google Scholar