Bubbles, Crashes and Information Contagion in Large-Group Asset Market Experiments
Tinbergen Institute Discussion Paper 2019-016/II
46 Pages Posted: 13 Mar 2019
Date Written: February 15, 2019
We study the emergence of bubbles in a laboratory experiment with large groups of individuals. The realized price is the aggregation of the forecasts of a group of individuals, with positive expectations feedback through speculative demand. When prices deviate from fundamental value, a random selection of participants receives news about overvaluation. Our findings are: (i) large asset bubbles occur in large groups, (ii) information contagion through news affects behaviour and may break the coordination on a bubble, (iii) time varying heterogeneity provides an accurate explanation of bubble formation and crashes, and (iv) bubbles are strongly amplified by coordination on trend-extrapolation.
Keywords: experimental finance, expectation formation, learning to forecast, financial bubbles
JEL Classification: C91, C92, D53, D83, D84
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