Asset pricing experiments
Henk van de Velden
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Henk van de Velden: CeNDEF, University of Amsterdam
No 5A.3, CeNDEF Workshop Papers, January 2001 from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance
In this paper we report the findings of an asset pricing experiment. In our experiment we use the same setup as in the paper of Brock and Hommes (1997). The participants in the experiment had to predict the price of period t+1 at time t given all previous prices up till period t-1. The rational or fundamental price pt* is given by the discounted sum of future dividends. Participants in the experiment are motivated by forecasting accuracy. In the theoretical asset pricing model there are 'bubble solutions' growing at the risk free rate of return 1+r. These bubble solutions are perfect foresight solutions and thus equally attractive as the fundamental solution. We find that the prices in the experiment are significantly different from the fundamental price in particular the experimental asset market seems to be undervalued. Another result was that the variance of the prices in the experiment is much higher than the variance under rational expectations, which might be an explanation of excess volatility as observed in real financial asset markets.
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Persistent link: https://EconPapers.repec.org/RePEc:ams:cdws01:5a.3
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