Futures Contracting and Dividend Uncertainty in Experimental Asset Markets

Porter, David; Smith, Vernon L.

doi:10.1086/296675

Cited by 204 publications

(200 citation statements)

References 4 publications

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“…They made the intriguing finding that assets are often traded in high volume at prices substantially above their fundamental values. The same finding was later confirmed by many other studies under a variety of treatments (e.g., Porter and Smith (1995), Lei, Noussair, and Plott (2001), Dufwenberg, Lindqvist, and Moore (2005), Ackert, et al (2006), Haruvy and Noussair (2006), Haruvy, Lahav, and Noussair (2007), Hirota and Sunder (2007), and Hussam, Porter and Smith (2008)). …”

Section: Bubbles In Labssupporting

confidence: 78%

Bubbles, Crises, and Heterogeneous Beliefs

Xiong

2013

Handbook on Systemic Risk

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This paper reviews the quickly growing literature that builds on heterogeneous beliefs, a widely observed attribute of individuals, to explain bubbles, crises, and endogenous risk in financial markets.Wei Xiong Princeton University Department of Economics Bendheim Center for Finance Princeton, NJ 08450 and NBER wxiong@princeton.edu 1The history of financial markets has been dotted with episodes of bubbles, during which market values of assets vastly exceeded reasonable assessments of their fundamental value. Asset price bubbles can lead to severe economic consequences ranging from wasteful over-investment and frenzied trading during booms to devastating financial crises and depressed real economies during busts. Economists have emphasized many aspects of bubbles and crises. Minsky (1974) advocated the view that excessive expansion of bank credit due to optimism can fuel a speculative euphoria and slowly lead the economy to a crisis. Kindleberger (1978) stressed that irrationally optimistic expectations frequently emerge among investors in the late stages of major economic booms and lead firm managers to over-invest, over-promise, and over-leverage, which sow the seeds for an eventual collapse after they fail to deliver on their promises.Shiller (2000) highlighted a host of psychological biases people use in forming a feedback mechanism, through which initial price increases caused by certain initial precipitating factors such as new technology innovations feed back into even higher asset prices through increased investor confidence and expectations. Allen and Gale (2007) focused on agency problems of professional managers who actively seek unwarranted risk, which leads to bubbles and crises.This chapter reviews a quickly growing body of work that was started by Harrison and Kreps (1978) that studies bubbles and crises based on heterogeneous beliefs, a widely observed attribute of individuals.In a market in which agents disagree about an asset's fundamental and short sales are constrained, an asset owner is willing to pay a price higher than his own expectation of the asset's fundamental because he expects to resell the asset to a future optimist at an even higher price. Such speculative behavior leads to a bubble component in asset prices. This approach does not require a substantial amount of aggregate belief distortions to generate a significant price bubble. Instead, the bubble component builds on the fluctuations of investors' heterogeneous beliefs. Even when investors' aggregate beliefs are unbiased, intensive fluctuations of their heterogeneous beliefs can lead to a significant price bubble through frenzied trading (e.g., Scheinkman and Xiong (2003)). This approach is flexible enough to incorporate several important aspects of bubbles and crises, such as over-investment (e.g., Bolton, ) and crashes (e.g., Abreu and Brunnermeier (2003) and Hong and Stein (2003)). Heterogeneous beliefs can also lead to credit cycles (e.g., Geanakoplos (2010)). The speculation induced by heterogeneous beliefs also lea...

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Section: Bubbles In Labssupporting

confidence: 78%

Bubbles, Crises, and Heterogeneous Beliefs

Xiong

2013

Handbook on Systemic Risk

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“…Subjects needed to experience the future to take it properly into account, which suggests that people may "induct forward," in the sense of choosing, then modifying their choice in repetitions when the outcomes turn out to be unsatisfying to them. Porter and Smith (1995) and Noussair and Tucker (2006).…”

mentioning

confidence: 99%

Theory and experiment: What are the questions?

Smith

2010

Journal of Economic Behavior & Organization

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136

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“…This phenomenon was first discovered by the classic study of Smith, Suchanek, and Williams (1988) and since then has been replicated in many other studies, e.g., Porter and Smith (1995); Lei, Noussair, and Plott (2001) ;Dufwenberg, Lindqvist, and Moore (2005); Ackert et al (2006); Haruvy and Noussair (2006) ;Haruvy, Lahav, and Noussair (2007);Hirota and Sunder (2007);and Hussam, Porter, and Smith (2008), under a variety of treatments. As is typical in these studies, markets are created for traders to trade dividendpaying assets with a lifetime of a finite number of periods.…”

Section: F Noncommon Knowledge Of Rationalitymentioning

confidence: 68%

“…This phenomenon was initially discovered by Vernon L. Smith, Gerry L. Suchanek, and Arlington W. Williams (1988) and later replicated by many other studies, e.g., David Porter and Smith (1995) Hirota and Shyam Sunder (2007); and Reshmaan Hussam, Porter, and Smith (2008), under various treatments. Our study also corroborates these studies in highlighting short-sales constraints as a key driver of asset bubbles.…”

mentioning

confidence: 71%

The Chinese Warrants Bubble

Xiong

2010

SSRN Journal

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Futures Contracting and Dividend Uncertainty in Experimental Asset Markets

Cited by 204 publications

References 4 publications

Bubbles, Crises, and Heterogeneous Beliefs

Bubbles, Crises, and Heterogeneous Beliefs

Theory and experiment: What are the questions?

The Chinese Warrants Bubble

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