Futures Markets and Bubble Formation in Experimental Asset Markets*

Abstract

We construct asset markets of the type studied in Smith et al . (1988), in which price bubbles and crashes are widely observed. In addition to a spot market, there are futures markets in operation, one maturing at the beginning of each period of the life of the asset. We find that when futures markets are present, bubbles do not occur in the spot markets. The futures markets seem to reduce the speculation and the decision errors that appear to give rise to price bubbles in experimental asset markets.

To see is to believe: Common expectations in experimental asset markets

“…Given that control questions are typically only included in working papers and do not nd their way into nal publications, we do not claim that they are seldom used, but it would appear that their use is not universal. Moreover, many of the examples we identied relate to features of the market institution that are novel to a specic paper, for example, the futures markets of Noussair and Tucker (2006), as opposed to the standard SSW environment itself. In short, the existing literature provides little clear guidance as to what to include in an appropriate set of control questions.…”

“…They made explicit the implication of SSW's conjecture that mispricing arises from uncertainty over the behavior of others namely that some subjects must doubt the rationality of others, and thus perceive an opportunity for speculation. To test this, LNP designed treatments in which speculation was not possible (by prohibiting subjects in the role of buyers from reselling, and subjects in the role of sellers from repurchasing), and nonetheless observed many transactions Hussam, Porter, and Smith (2008) 2 Noussair and Tucker (2006) sequentially open a complete set of futures markets, in reverse order of maturity, prior to opening the spot market; they state explicitly that this is intended to facilitate backward-induction reasoning over the FV. Lei and Vesely (2009) introduce a pre-market phase in which subjects passively experience a ow of dividends.…”

Theory and experiment: What are the questions?

“…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).…”

Experimental Research on Asset Pricing

“…However, as in markets for shorter-lived assets, futures markets lead to closer adherence of spot prices to fundamental values (Noussair and Tucker, 2006). This literature is reviewed in detail by Palan (2013).…”