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Asset Markets with OLG BEM 2012 8. 6. 2012, Bratislava

Asset Markets with OLG BEM 2012 8. 6. 2012, Bratislava. Prices in economics. Markets and prices are a critical feature of economies ( Coase , 1937) Market prices serve as signals, coordinating the activities of dispersed individuals with dispersed knowledge ( Hayek , 1945)

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Asset Markets with OLG BEM 2012 8. 6. 2012, Bratislava

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  1. AssetMarketswith OLG BEM 2012 8. 6. 2012, Bratislava

  2. Prices in economics Markets andpricesare a critical feature of economies (Coase, 1937) Market prices serve as signals, coordinatingthe activities of dispersed individualswithdispersedknowledge (Hayek, 1945) Markets are theoretically rational if pricesreflect all available information (Muth,1961) Abovementionedqualitieswelldemonstrated by experiments (Smithatal., 1956 and on)

  3. CanonicalAM experiments Assetmarket prices have become unhinged from thefundamentalvalue, sometimes for extended periods (with negativeeffects propagatedthrough the wholeeconomy when the market corrects) Supported by experimental evidence (Smith, Suchanek, Williams, 1988 and on) There are hundreds of laboratoryexperiments replicating and extending the results of SSW

  4. Bubblesat AM experiments Bubble: “persistentdeviations of prices from fundamentals” at high volumes of trade (Haruvyand Noussair, 2006)

  5. RobustnessofAM experiments Shortselling, margin buying, limit price-change rules, insider tradingand increasing levels of subject experience (King etal., 1993, Van Boening, Williams, and LaMaster, 1993) Constantfundamentalvalue (Bostian, Goeree and Holt, 2005) Futurescontracting and dividend uncertainty (Porter andSmith, 1995) No dividends (Oechssler, Schmidt andSchnedler, 2007)

  6. Summary ofAM experiments more than 20 years of follow-up research, the incidence of asset market bubblesidentified in the original paper by Smith et al. (1988) still holds almost regardless of thecircumstances, with the only exception being super-experienced traders. Experimental asset marketsappear to be prone to bubble creation.

  7. „Flaws“ ofcanonicalsetting AllAM experiment suffertwofundamental „flaws“ – EoWand „inflation“ the end of the world” (EoW)ishighlyunrealistic in fundamentalway = itis more thantheend of trading. It is the common knowledge that there is no activity after that particular moment foranyone „inflation“ – increasingamountof money in the experiment

  8. Smith-Porter-Deckproject (2011) Introduce OLG setting However, newgenerationbringsnewliquidity to the market

  9. Design I 4 generations(eachgeneration 9 subejcts) Lifetimeofthegeneration: average10 periods Somemembers „die“ earlierthanothers RedemptionvalueforAssetattheendoftrading (100) New entrants„step intoshoes“ ofdyingones Thereis no link betweendifferentgenerations Average dividend: 5 (min: 0, max12, randomlydrawn)

  10. Design II Interest rate on money: 5 % Initial endowment: 3 shares and 300 EUs Redemption value for exiting subjects – market value of the share plus discounted value of the money Institution: double auction market with multiple subjects

  11. Pilot experiments 3 generations 2 groups (24 peopleeach) – UEP and WVU students 1 generation = 8 people 30 periodsoftrading No experiencewith AM experimentsbefore Paid by „points“ March 2012

  12. Pilot experiments - results

  13. Real life – the case oftheCzechcapital market

  14. Experiments 4 generations 2 groups(32 peopleeach) – UEP students 1 generation = 8 people 40 periodsoftrading No experiencewith AM experimentsbefore Paid by real money Averageearnings 550 CZK / 22 EUR May 2012

  15. Experiments - results

  16. Experiments - interpretation So far INCONCLUSIVE! No bubbleswiththegenerationalswitch – ifanythingprices go DOWN! Thereis a volatility thatappears to be a long sustained bubble(with exception of the last generation perhaps) Smith, Porter Deckresults are due to additionalliquitidy – not due to generationalswitch

  17. Experiments – othertreatments „Sudden“ generationalswitch No inflationtreatment Continuouschange Time: June 2012 Thanksforfinancing: Liberalni institute and IGS UEL

  18. Thankyouforyourattention

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