A classical model of speculative asset price dynamics

Sabiou M. Inoua and Vernon Smith ()

Journal of Behavioral and Experimental Finance, 2023, vol. 37, issue C

Abstract: In retrospect, the experimental findings on competitive market behavior called for a revival of the old, classical, view of competition as a collective higgling and bargaining process (as opposed to price-taking behaviors) founded on reservation prices (in place of the utility function). In this paper, we specialize the classical methodology to deal with speculation, an important impediment to price stability. The model involves typical features of a field or lab asset market setup and lends itself to an experimental test of its specific predictions; here we use the model to explain three general stylized facts, well established both empirically and experimentally: the excess, fat-tailed, and clustered volatility of speculative asset prices. The fat tails emerge in the model from the amplifying nature of speculation, leading to a random-coefficient autoregressive return process (and power-law tails); the volatility clustering is due to the traders’ long memory of news; bubbles are a persistent phenomenon in the model, and, assuming the standard lab present value pattern, the bubble size increases with the proportion of speculators and decreases with the trading horizon.

Keywords: Retradable assets; Speculation; Bubbles; Excess volatility; Clustered volatility; Power law of returns; Asset experiments; Classical economics (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S2214635022001022

Related works:
Working Paper: A Classical Model of Speculative Asset Price Dynamics (2023)
Working Paper: A Classical Model of Speculative Asset Price Dynamics (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:37:y:2023:i:c:s2214635022001022

DOI: 10.1016/j.jbef.2022.100780

Access Statistics for this article

Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and Jürgen Huber

More articles in Journal of Behavioral and Experimental Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().