Thu, 21 Aug 2008 01:23:14 BST CiteULike: gi0rgi0ne's library [157 articles] http://www.citeulike.org/user/gi0rgi0ne/article/996648 CiteULike.org en-gb Copyright © 2004-2008 citeulike.org http://www.citeulike.org/user/gi0rgi0ne/article/996648 <i>Econometrica, Vol. 56, No. 5. (1988), pp. 1119-1151.</i><br /><br />Spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of T = 15 (or 30) trading periods. Fourteen of twenty-two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value. When traders are experienced this reduces, but does not eliminate, the probability of a bubble. The regression of changes in mean price on lagged excess bids (number of bids minus the number of offers in the previous period), P"t - P"t-1 = @a = @b(B"t"-"1 - O"t"-"1), supports the hypothesis that -@a = E(d), the one-period expected value of the dividend, and that @b > O, where excess bids is a surrogate measure of excess demand arising from homegrown capital gains (losses) expectations. Thus when (B"t"-"1 - O"t"_"1) goes to zero we have convergence to rational expectations in the sense of Fama (1970), that arbitrage becomes unprofitable. The observed bubble phenomenon can also be interpreted as a form of temporary myopia (Tirole, 1982) from which agents learn that capital gains expectations are only temporarily sustainable, ultimately inducing common expectations, or "priors" (Tirole, 1982). Four of twenty-six experiments, all using experienced subjects, yield outcomes that appear to the "chart's eye" to converge "early" to rational expectations, although even in these cases we get @b > O, and small price fluctuations of a few cents that invite "scalping." Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets Vernon Smith Gerry Suchanek Arlington Williams Econometrica, Vol. 56, No. 5. (1988), pp. 1119-1151. 2006-12-15T07:43:47-00:00 1988 Econometrica 56 5 1119 1151 bubbles