Derivation of Asset Price Equations Through Statistical Inference

Caginalp, Gunduz; Ilieva, Vladimira; Porter, David C.; Smith, Vernon L.

doi:10.1207/s15427579jpfm0404_4

Cited by 3 publications

(1 citation statement)

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“…We utilize the data from experiments reported by Caginalp et al [2003]. These experiments consisted of 9 to 14 participants trading through a computer network in which there are 15 periods of three minutes each with a one minute break after each period.…”

Section: The Experimentsmentioning

confidence: 99%

The dynamics of trader motivations in asset bubbles

Caginalp

Ilieva²

2008

Journal of Economic Behavior & Organization

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Asset market experiments are analyzed by distinguishing, ex post facto, participants who trade on fundamentals versus those who trade on momentum (i.e., buying when price is rising). The distinction is made when prices are above fundamental value, so that (in each period) those who have more offers than bids (net offerers) are classified as fundamentalists while those who have more bids than offers (net bidders) are defined to be momentum players. By analyzing the data of individual behavior we are able to address a number of key questions regarding bubbles. We find evidence that the cash supply of the momentum traders diminishes and the cash supply of the fundamental traders increases as the bubble forms. This suggests that the bubble is fueled by the cash of the momentum players and the reversal is caused by inadequate cash in their possession. These data are used in conjunction with a difference equation for price dynamics for two groups. The momentum traders exhibit a positive coefficient for price derivatives and a very small negative coefficient for trading based upon the deviation from fundamental value. Surprisingly, however, the fundamental traders, who exhibit a positive coefficient for trading on valuation, also exhibit a significantly positive coefficient for trend based buying. Thus, even those who are net offerers, classified as fundamentalists, are selling less and buying more of overvalued stock when there is a strong positive recent price change. There is also evidence that some fundamentalists change strategy to momentum trading as prices soar. An additional result is that the trend coefficient of the momentum traders vanishes with the implementation of an "open book" that allows traders to see all trades as they are entered.JEL classification: G 120; C 900

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Section: The Experimentsmentioning

confidence: 99%