Bubbles, crashes and information contagion in large-group asset market experiments

Cars Hommes, Anita Kopányi-Peuker and Joep Sonnemans (joepsonnemans@gmail.com)

No 19-016/II, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: C91 C92 D53 D83 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
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Journal Article: Bubbles, crashes and information contagion in large-group asset market experiments (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20190016

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