Experiments on Financial Markets
Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: Te Bao, Nanyang Technological University
Experimental Asset Markets with An Indenfiite Horizon
AbstractAbstract: We study the pricing and trade of infinitely lived assets in experimental markets. Our experimental design disentangles several confounding factors in such markets: (1) payoff uncertainty about the asset's dividend payments; (2) horizon uncertainty about the duration of trade in the asset, and (3) the assumption that agents are risk neutral expected utility maximizers. In a baseline treatment with all of these features or assumptions in place, we find that trading prices are on average more than 40% below the risk-neutral fundamental value, and decrease further as traders gain experience. In the two other treatments, we separate trade in the asset from dividend realizations. While there continues to exist uncertainty in the number of dividend payments, coupled with or without the uncertainty in the length of the trading horizon, we find that market prices in the latter two treatments are not significantly different from the asset's risk-neutral fundamental value. We therefore conclude that the low trading prices observed in our baseline, indefinite-horizon market cannot be explained by assuming risk neutral expected utility maximizers. By contrast, an Epstein-Zin recursive preference specification that allows risk preferences to be disentangled from preferences for certainty an account for the low trading prices observed in our baseline treatment. Indeed, a further contribution of our paper is that we propose a method to calculate the risk-adjusted market fundamental value of the asset under expected utility or under Epstein-Zin preferences, respectively.
Rational Expectations in an Experimental Asset Market with Shocks to Market Trends
AbstractWe construct an experimental asset market in which the time trend of the fundamental value is subject to a shock. The design of the experiment allows testing of whether prices adhere to rational expectations levels, and whether there is over- or under-reaction to new information. We find that prices conform closely to rational expectations and episodes of mispricing are rare. A meta-analysis allows us to update our beliefs about whether experimental asset markets exhibit a generic tendency to misprice, particularly in bearish environments.
CEO Incentives and Stock Price Dynamics: An Experimental Approach
AbstractWe investigate experimentally how granting a CEO with stock ownership and the opportunity to trade influence the CEO’s effort and overall market behavior. In our design, CEO effort affects the fundamental value of the firm. Our findings suggest that stock ownership alone does not significantly increase the CEO’s effort. However, CEOs tend to accumulate additional shares when they are given the opportunity to trade, and this leads to greater CEO effort. In all treatments, prices tend to reflect underlying fundamentals and bubbles are rare. When CEOs receive stock ownership, price deviates less from the fundamental values. When CEOs can trade shares, the asset exhibits somewhat greater mispricing.
- C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- C9 - Design of Experiments