Price stability and volatility in markets with positive and negative expectations feedback: an experimental investigation
Heemeijer, Peter, Hommes, Carsien Harm, Sonnemans, Joep and Tuinstra, Jan (2006) Price stability and volatility in markets with positive and negative expectations feedback: an experimental investigation. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Working papers (Warwick Business School. Financial Econometrics Research Centre) (No.06-).
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The evolution of many economic variables is affected by expectations that economic agents have with respect to the future development of these variables. Here we show, by means of laboratory experiments, that market behavior depends to a large extent on how the realized market price responds to an increase in average price expectations. If it responds by decreasing, as in commodity markets, prices converge quickly to their equilibrium value, confirming the rational expectations hypothesis. If the realized price increases after an increase of average expectations, as is typical for financial markets, large fluctuations in realized prices are likely.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Capitalism, Accounting and price fluctuations, Experimental economics, Pricing -- Mathematical models|
|Series Name:||Working papers (Warwick Business School. Financial Econometrics Research Centre)|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Official Date:||May 2006|
|Number of Pages:||35|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Nederlandse Organisatie voor Wetenschappelijk Onderzoek [Netherlands Organisation for Scientific Research] (NWO)|
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