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Multi-period experimental asset markets with distinct fundamental value regimes

An Erratum to this article was published on 09 May 2015

Abstract

In this methodological study we analyze price adjustment processes in multi-period laboratory asset markets with five distinct fundamental value \((\hbox {FV})\) regimes in a unified framework. Minimizing the effect of between-treatment variations we run markets with deterministically decreasing, constant, randomly fluctuating and—as main innovation—markets with deterministically increasing \(\hbox {FV}\)s. We find (i) efficient pricing in markets with constant \(\hbox {FV}\)s, (ii) overvaluation in markets with decreasing \(\hbox {FV}\)s, and (iii) undervaluation in markets with increasing \(\hbox {FV}\)s. (iv) Markets with randomly fluctuating fundamentals show overvaluation when \(\hbox {FV}\)s predominantly decline and undervaluation when \(\hbox {FV}\)s are mostly upward-sloping. Finally, we document that (v) bid-ask spreads and volatility of price changes are positively correlated with mispricing across regimes. The main contribution of the paper is to provide clean comparisons between distinct \(\hbox {FV}\) regimes, in particular between markets with increasing \(\hbox {FV}\)s and other regimes.

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Fig. 1
Fig. 2

Notes

  1. 1.

    See e.g. Noussair et al. (1998), Haruvy and Noussair (2006), Noussair and Tucker (2006), Hanke et al. (2010), Huber et al. (2011), Kirchler et al. (2011), Huber et al. (2012).

  2. 2.

    Due to technical problems two markets had to be ended early. Market 4 of \(\hbox {R1}(\backslash )\) and market 2 of R2(—) ended after period 11 and period 12, respectively. Because calculation of RAD and RD allow for different numbers of periods we do not expect any consequences for the interpretation of the results.

  3. 3.

    Results are based on pooled data as we do not have sufficient data on the treatment level.

  4. 4.

    Noussair et al. (2001) report some bubble activity leading them to conclude that constant \(\hbox {FV}\)s cannot completely eliminate bubbles.

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Acknowledgments

We thank participants of SAET 2011 and Experimental Finance 2011 for helpful comments. Financial support by the Austrian National Bank (OeNB-Grants 12789 and 14953), the Austrian Science Foundation (FWF-Grant 20609 and FWF-Grant 22400, START-Grant Y617-G11), and the University of Innsbruck (Nachwuchsförderung Stöckl) is gratefully acknowledged.

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Correspondence to Thomas Stöckl.

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Appendices

Appendices

Appendix 1: Individual market results

See Table 5.

Table 5 Individual market results for RAD, RD, SPREAD, VOLA and ST for regimes \(\hbox {R1}(\backslash )\) to \(\hbox {R5}(\mathcal {\hbox {N}})\)

Appendix 2: Time series of transaction prices by treatments

Markets of R1\(\left( \backslash \right) \)

See Fig. 3.

Fig. 3
figure3

Fundamental value (\(\hbox {FV}\), bold line) and individual transaction prices (black line with circles) as a function of transaction time for markets 1–6 of \(\hbox {R1}(\backslash )\)

Markets of R2(—)

See Fig. 4.

Fig. 4
figure4

Fundamental value (\(\hbox {FV}\), bold line) and individual transaction prices (black line with circles) as a function of transaction time for markets 1–6 of R2(—)

Markets of R3(/)

See Fig. 5.

Fig. 5
figure5

Fundamental value (\(\hbox {FV}\), bold line) and individual transaction prices (black line with circles) as a function of transaction time for markets 1–6 of \(\hbox {R}3(/)\)

Markets of R4(tri)

See Fig. 6.

Fig. 6
figure6

Fundamental value (\(\hbox {FV}\), bold line) and individual transaction prices (black line with circles) as a function of transaction time for markets 1–6 of \(\hbox {R4(tri)}\)

Markets of R5\((\mathcal {{N}})\)

See Fig. 7.

Fig. 7
figure7

Fundamental value (\(\hbox {FV}\), bold line) and individual transaction prices (black line with circles) as a function of transaction time for markets 1–6 of \(\hbox {R5}(\mathcal {\hbox {N}})\)

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Stöckl, T., Huber, J. & Kirchler, M. Multi-period experimental asset markets with distinct fundamental value regimes. Exp Econ 18, 314–334 (2015). https://doi.org/10.1007/s10683-014-9404-1

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Keywords

  • Experimental finance
  • Asset market
  • Bubble
  • Market efficiency
  • Fundamental value

JEL Classification

  • C92
  • D84
  • G10