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Bubbles and crashes in experimental asset markets by Stefan Palan

By Stefan Palan

This e-book describes a laboratory test designed to check the motives and homes of bubbles in monetary markets and explores the query if it is attainable to layout markets which keep away from such bubbles and crashes. within the scan, matters got the chance to exchange in a inventory marketplace modeled after the seminal paintings of Smith et al. (1988). To account for the expanding significance of on-line making a bet websites, topics have been additionally allowed to alternate in a electronic choice marketplace. the results shed new gentle on how topics shape and replace their expectancies, putting specific emphasis at the bounded rationality of traders. a variety of analytical bubble measures present in the literature are accrued, calculated, categorised and awarded for the 1st time. The very fascinating new bubble measures "Dispersion Ratio", "Overpriced Transactions" and "Underpriced Transactions" are built, making the publication an immense step in the direction of the study objective of stopping bubbles and crashes in monetary markets. moreover, the ebook formulates concrete new study hypotheses for destiny studies.

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Walker (1993b) Smith et al. (1988) distinguished between two definitions of rational expectations. 29 They interpreted the difference to be that rational expectations according to Nash (1950) need to be sustained or reinforced by outcomes, while rational expectations as defined by Muth (1961) are implied to be sustained by outcomes that in turn support theoretical predictions. ” In short, the rational expectations hypothesis states that the expected price is an unbiased predictor of the actual price.

Cao (1999) proposed a model which implied that the introduction of options caused an increase in the prices of the underlying asset and the market index, decreased the price response of the asset upon new public information, and increased the number of analysts following the underlying asset (consistent with Skinner (1990)). His empirical evidence backed up the predictions of the model, supporting his hypothesis that the installation of an options market induced investors to acquire more precise information, because it gave them additional opportunities to profit from trading on it.

38 2 Literature Review made up of 43–50% inexperienced subjects and 50–57% (mostly twice) experienced subjects. , weather forecasts), whereas they perform poorly in environments of dynamic stimuli and human behavior, such as financial markets. In their empirical study, they compared expert subject forecasts of the EUR/USD exchange rate from January 1999 to March 2003 with the forecasts of inexperienced students. To further enrich their tests, the students were provided with no other information than the realizations of the time series; they were not even told what kind of time series it was they were seeing and forecasting.

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