Speculation and Price Indeterminacy in Financial Markets: An Experimental Study

Shinichi Hirota, Juergen Huber, Thomas Stockl and Shyam Sunder
Additional contact information
Shinichi Hirota: School of Commerce, Waseda University
Juergen Huber: Dept. of Finance, University of Innsbruck
Thomas Stockl: Dept. of Banking and Finance, University of Innsbruck

No 2134, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: To explore how speculative trading influences prices in financial markets we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) as well as dividend-collecting investors. We find that in markets with only speculating investors (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) the "mispricing" is likely to be strategic and not irrational; (iv) mispricing increases with the number of transfers until maturity; and (v) speculative trading pushes prices upward (downward) when liquidity is high (low).

Keywords: Experimental finance; Speculation; Rational expectations; Price efficiency; Price bubbles; Overlapping generations; Backward and forward induction (search for similar items in EconPapers)
JEL-codes: C91 G11 G12 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2018-05
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Speculation and Price Indeterminacy in Financial Markets: An Experimental Study (2020)
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