Cash Inflows and Bubbles in Asset Markets With Constant Fundamental Values

Abstract

Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time. This contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time. We report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time. Thus, high cash levels will lead to bubbles, if the cash is introduced before the market opens. Our results reconcile the two previous sets of findings. (JEL C90, D03, G02, G12)

Traders’ heterogeneity and bubble-crash patterns in experimental asset markets

“…Kirchler et al (2012) and Huber and Kirchler (2012) show that the main source for subject-confusion is the decreasing fundamental value process. However, Noussair et al (2001), Noussair and Tucker (2014) and Baghestanian and Walker (2014) show that bubbles emerge also in environments with flat fundamental value. Other studies suggest that while confusion plays a role in the formation of bubbles and mispricing, strategic uncertainty and the lack of common expectations also play an important role, e.g., Akiyama et al (2013) and Cheung et al (2014).…”

Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset

“…In one treatment (T2, with a constant EV) however, Huber, Kircheler and Stockl (2012) report that cash addi-tions do not result in bubbles. Noussair and Tucker (2014) replicate that result, and argue that the timing of the cash additions-late in the markets-is what prevents bubbles from forming. Kirchler et al (2015) report another treatment where cash additions do not lead to bubbles.…”

“…Indeed, in their treatment four (T4), which combines a constant EV with constant liquidity, bubbles are completely absent. This result is replicated by Noussair and Tucker (2014). Johnson and Joyce (2012) also report that markets with constant or increasing EV do not routinely exhibit bubbles and crashes.…”

Aggregation mechanisms for crowd predictions

“…7 This ensures that traders are able to make transactions at reasonable frequencies and prices but it is also reasonably low to avoid biasing our results by cash endowment effects (see Kirchler et al. 2012 ; Noussair and Tucker 2016 and the references therein for evidence on the effect of cash endowments on mispricing). Participants then trade jars for cash for 3 min both in the CA and in the CDA treatments.…”