Individual speculative behavior and overpricing in experimental asset markets

Dirk Jan Janssen, Sascha Füllbrunn*, Utz Weitzel

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

A rich history of theoretical models in finance shows that speculation can lead to overpricing and price bubbles. We provide evidence that, indeed, individual speculative behavior fuels overpricing in (experimental) asset markets. In a first step, we elicit individual speculative behavior in a one-shot setting with a novel speculation elicitation task (SET). In a second step, we use this measure of speculative behavior to compose dynamic, continuous double auction markets in line with Smith et al. (Econometrica 56(5):1119–1151, 1988). We find significant higher overpricing in markets with traders who exhibited more speculative behavior in the individual SET. However, we find no such differences in overpricing when we test for alternative explanations, using a market environment introduced by Lei, Noussair, and Plott (Econometrica 69(4):831–859, 2001) where speculation is impossible. Taken together, our results corroborate the notion that speculation is an important factor in overpricing and bubble formation if market environments allow for the pursuit of capital gains.

Original languageEnglish
Pages (from-to)653-675
Number of pages23
JournalExperimental Economics
Volume22
Issue number3
DOIs
Publication statusPublished - Sep 2019

Keywords

  • Experimental asset markets
  • Financial economics
  • Speculation

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