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Bubble Formation and (In)efficient Markets in Learning-to-Forecast and -Optimize Experiments

Author

Listed:
  • Bao, T.

    (University of Amsterdam)

  • Hommes, C.H.

    (University of Amsterdam)

  • Makarewicz, T.A.

    (University of Amsterdam)

Abstract
This experiment compares the price dynamics and bubble formation in an asset market with a price adjustment rule in three treatments where subjects (1) submit a price forecast only, (2) choose quantity to buy/sell and (3) perform both tasks. We find that bubbles emerge in all these treatments, but to a larger degree in treatment (2) and (3). Our result confirms that bubble formation is a robust finding in markets with positive expectation feedback. We also find some repeated ``super bubbles'' where the price is 3 times larger than the fundamental value, which were not seen in former experiments.

Suggested Citation

  • Bao, T. & Hommes, C.H. & Makarewicz, T.A., 2014. "Bubble Formation and (In)efficient Markets in Learning-to-Forecast and -Optimize Experiments," CeNDEF Working Papers 14-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    • Handle: RePEc:ams:ndfwpp:14-01
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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