Forecasting returns instead of prices exacerbates financial bubbles

Nobuyuki Hanaki, Cars Hommes, Dávid Kopányi, Anita Kopányi-Peuker and Jan Tuinstra

Experimental Economics, 2023, vol. 26, issue 5, No 7, 1185-1213

Abstract: Abstract Expectations of future returns are pivotal for investors’ trading decisions, and are therefore an important determinant of the evolution of actual returns. Evidence from individual choice experiments with exogenously given time series of returns suggests that subjects’ return forecasts are substantially affected by how they are elicited and by the format in which subjects receive information about past asset performance. In order to understand the impact of these effects found at the individual level on market dynamics, we consider a learning to forecast experiment where prices and returns are endogenously determined and depend directly upon subjects’ forecasts. We vary both the variable (prices or returns) subjects observe and the variable (prices or returns) they have to forecast, with the same underlying data generating process for each treatment. Although there is no significant effect of the presentation format of past information, we do find that markets are significantly more unstable when subjects have to forecast returns instead of prices. Our results therefore show that the elicitation format may exacerbate, or even create, bubbles and crashes in financial markets.

Keywords: Experimental finance; Expectation formation; Asset market; Presentation formats (search for similar items in EconPapers)
JEL-codes: C72 D43 G41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10683-023-09815-9 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
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:kap:expeco:v:26:y:2023:i:5:d:10.1007_s10683-023-09815-9

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/10683/PS2

DOI: 10.1007/s10683-023-09815-9

Access Statistics for this article

Experimental Economics is currently edited by David J. Cooper, Lata Gangadharan and Charles N. Noussair

More articles in Experimental Economics from Springer, Economic Science Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().