Initial cash/asset ratio and asset prices: An experimental study

Caginalp, Gunduz; Porter, David; Smith, Vernon L.

doi:10.1073/pnas.95.2.756

Cited by 135 publications

(97 citation statements)

References 11 publications

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“…Convergence was markedly slower in retrade vs. no retrade because traders who could retrade had difficulty learning from market prices their optimal role as buyers or sellers. High cash exacerbated this difficulty relative to low cash, in line with previous findings (14). Haruvy et al (ref.…”

supporting

confidence: 81%

Retrading, production, and asset market performance

Gjerstad

Porter

Smith

et al. 2015

Proc. Natl. Acad. Sci. U.S.A.

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Prior studies have shown that traders quickly converge to the price-quantity equilibrium in markets for goods that are immediately consumed, but they produce speculative price bubbles in resalable asset markets. We present a stock-flow model of durable assets in which the existing stock of assets is subject to depreciation and producers may produce additional units of the asset. In our laboratory experiments inexperienced consumers who can resell their units disregard the consumption value of the assets and compete vigorously with producers, depressing prices and production. Consumers who have first participated in experiments without resale learn to heed their consumption values and, when they are given the option to resell, trade at equilibrium prices. Reproducibility is therefore the most natural and most effective treatment for suppression of bubbles in asset market experiments.durable assets | stock-flow markets | specialization of trade | asset market bubbles C ontrary to rational theory the first asset market experiments with complete common information on fundamental value exhibited unexpectedly strong tendencies to yield price bubbles (1). The results, however, were soon extended (2, 3), independently replicated (4-8), and have quite important consequences for improved understanding of the sources of instability in the economy (9-11).In contrast with these robust asset market findings, earlier experiments had established that repeated trade across time periods in static supply and demand experiments yielded efficient rapid convergence to rational competitive equilibrium outcomes under strictly private decentralized information (12). In the supply and demand experiments, however, trades were for immediate consumption, as with hamburgers and haircuts; as noted in ref. 13, items could not be retraded and individuals knew in advance that they were specialized as buyers or sellers and could not switch roles depending on price as in asset markets.[These features also characterize nondurable goods and services in the US national accounts and represent approximately 75% of private product. Instability in the US national accounts arises from the remaining 25% (11)].Motivated by the glaring contrast in these two kinds of markets, Dickhaut et al. (13) reformulated the traditional supply and demand environment by explicitly modeling two goods: "cash" as a means of payment and a "commodity" that had a heterogeneous end-of-period "dividend" consumption yield value. This formulation exactly parallels the asset trading environment, except that cash and commodity endowments have only a oneperiod life and dividends are not common. Individual subjects received diverse endowments, but in each of 10 periods a subject was endowed with the same amounts of cash and commodity, thus inducing pure static supply and demand conditions across 10 periods. This reformulated framework allowed the study of convergence in a 2 × 2 design, (retrade, no retrade) × (low cash, high cash). Convergence was markedly slower in retrade vs. no retr...

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confidence: 81%

Retrading, production, and asset market performance

Gjerstad

Porter

Smith

et al. 2015

Proc. Natl. Acad. Sci. U.S.A.

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“…We conducted some pilot experimental sessions, which are not reported here, and found that investors quickly made full adjustments for share splits. 7 See Caginalp et al (1998) for a discussion of the effect of varying cash and asset endowments on bubble magnitudes.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Asset Repurchases and Issues in an Experimental Market

Haruvy¹,

Noussair

Powell

2012

SSRN Journal

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We create an experimental asset market in which we conduct share repurchases and share issues. Although the intrinsic value of the shares is independent of the quantity outstanding, the interventions result in changes in asset price. Specifically, we find the following.(1) A repurchase of shares increases the price of the asset, and a share issue decreases the price of the asset, compared to a benchmark of no intervention. These effects are consistent with downward-sloping demand for the asset. (2) The empirical patterns observed are consistent with a model based on that proposed by DeLong et al. (1990), which posits three trader types--fundamental, speculator, and momentum--interacting in the market. (3) The downward pressure on prices resulting from share issues drives prices down toward, but not beyond, fundamental values. This downward resistance at the fundamental value is predicted by the model, in which it arises from the impact of an intervention on the proportion of the total stock of units and cash held by each trader type.

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“…Although our purpose here is to examine only single period trading behavior with static repetition, the original bubbles literature found that the most effective treatment variables were experience and the ratio of cash to share endowments-and hence, the importance of varying cash, as well as experience, in our experiments. The work by Caginalp et al (9) finds that deviations from fundamental value increase as the ratio of endowed cash to share value increase. Smith et al (10) find that deviations from fundamental value disappear when all dividends are deferred to the end.…”

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confidence: 99%

Commodity durability, trader specialization, and market performance

Dickhaut

Lin

Porter

et al. 2012

Proc. Natl. Acad. Sci. U.S.A.

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The original double auction studies of supply and demand markets established their strong efficiency and equilibrium convergence behavior using economically unsophisticated and untrained subjects. The results were unexpected because all individual costs and values were private and dependent entirely on the market trading process to aggregate the dispersed information into socially desirable outcomes. The exchange environment, however, corresponded to that of perishable, and not re-traded goods in which participants were specialized as buyers or sellers. We report experiments in repeated single-period markets where tradability, and buyer-seller role specialization, is varied by imposing or relaxing a restriction on re-trade within each period. In re-trade markets scope is given to speculative motives unavailable where goods perish on purchase. We observe greatly increased trade volume and decreased efficiency but subject experience increases efficiency. Observed speculation slows convergence by impeding the process whereby individuals learn from the market whether their private circumstances lead them to specialize as buyers or sellers.durable goods | specialization of trade | speculation and liquidity E quilibrium between supply and demand (S&D) based on subjective marginal unit value was first articulated by Jevons (1) in 1862.* The model is here characterized by buyers whose consumption values vary for a commodity and sellers who can supply the commodity at varying costs. When a buyer buys a unit, both buyer and seller earn a private surplus. There exists a price at which quantity demanded equals quantity supplied defined as the equilibrium price and quantity. At this price, the total social surplus is maximized, and full efficiency is achieved. Jevons (3) believed that this theoretical equilibrium would not be achievable unless all participants had "perfect knowledge of the conditions of supply and demand, and the consequent ratio of exchange" or price (3).The theory was tested in the laboratory one century later, yielding the unanticipated result of rapid convergence to efficient outcomes. Naïve subjects, learning through experience and informed only of their own marginal value (cost) information, have no prevision of the S&D equilibrium, but they discover it by sequential adjustment of their trades (4). Until experimental research established that the perfect knowledge conditions were neither necessary nor sufficient for empirical S&D equilibrium to be closely approximated by untrained subjects, Jevons' belief was widely accepted in economics [proposition 6 in the work by Smith (5)].These experiments share characteristics common to nondurable consumer goods and services in the national economy (e.g., hamburgers and haircuts): buyers and sellers who are specialized in their roles do not retrade, have premarket knowledge of their role, and values are realized immediately on purchase or sale. As we move from services and other items that perish with their purchase to goods durable enough to be retraded, the pa...

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Initial cash/asset ratio and asset prices: An experimental study

Cited by 135 publications

References 11 publications

Retrading, production, and asset market performance

Retrading, production, and asset market performance

The Impact of Asset Repurchases and Issues in an Experimental Market

Commodity durability, trader specialization, and market performance

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