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 2134R, 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) and dividend- collecting investors. Moreover, we operate markets at two di"erent levels of money supply. We "nd that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.

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, Revised 2020-04
New Economics Papers: this item is included in nep-exp and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Economic Behavior and Organization (June 2020)

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Working Paper: Speculation and Price Indeterminacy in Financial Markets: An Experimental Study (2018)
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