Price Dynamics and Consumption Smoothing in Experimental Asset Markets

Edward Halim, Yohanes Riyanto and Nilanjan Roy

MPRA Paper from University Library of Munich, Germany

Abstract: We report the results of an experiment designed to study the determinants of asset price movement and consumption smoothing behavior across asset markets populated with varying proportion of traders with and without having induced motive to smooth consumption. Although the asset is over-priced compared to the risk-neutral fundamental value in all sessions, the extent of over-pricing and magnitude of price movement is significantly higher when traders with no induced motive to trade are present. We also find that the price of the asset co-moves with the dividend state, with price predictability being higher in the presence of traders with induced motive to smooth consumption. Participants motivated to minimize consumption fluctuations are able to do so with the inclination being more for those having lower initial endowment. With fixed prices, traders are able to smooth consumption not only over periods but also over the dividend states.

Keywords: Asset Markets; Uncertainty; Experimental Economics; Price Predictability; Consumption Smoothing (search for similar items in EconPapers)
JEL-codes: C91 C92 D84 D91 G12 (search for similar items in EconPapers)
Date: 2016-05-27
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 (4)

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https://mpra.ub.uni-muenchen.de/76447/1/MPRA_paper_71631.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/76447/8/MPRA_paper_76447.pdf revised version (application/pdf)

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