CFDP 2134R
Speculation and Price Indeterminacy in Financial Markets: An Experimental Study
Author(s):Publication Date: June 2018
Revision Date: April 2020
Pages: 77
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 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, G12
JEL Classification Codes: C91G11G12
See CFDP Version(s): CFDP 2134