Publication Date: June 2018
Revision Date: April 2020
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 diﬀerent levels of money supply. We ﬁnd 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, Money supply, Rational expectations, Price efficiency, Price bubbles, Overlapping generations, Backward and forward induction
JEL Classification Codes: C91, G11, G12CFDP 2134