The Impact of Asset Repurchases and Issues in an Experimental Market

Abstract

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.

Bubble Formation and (In)Efficient Markets in Learning-to-Forecast and -Optimise Experiments

“…This approach has been followed in many studies e.g. Lei et al (2001); Noussair et al (2001); Dufwenberg et al (2005); Haruvy and Noussair (2006); Akiyama et al (2012); Haruvy et al (2013); Füllbrunn et al (2014).…”

Experimental Research on Asset Pricing

“…The rational speculator anticipates future price movements and purchases (sells) if she expects prices to rise (fall). Haruvy et al (2012) test whether this structure predicts the observed treatment differences in an experiment in which the experimenter purchases and resells units of asset. The model predicts a reshuffling among traders that induces a repurchase to exacerbate bubbles and a share issue of sufficient size to induce prices to track fundamentals.…”

“…They do not find a correlation between emotional state and trading profits. Haruvy et al (2012) apply the model of DeLong et al (1990) to describe data from an asset market experiment with the structure of Smith et al (1988). The DeLong et al model postulates three trader types: fundamental value, momentum, and rationally speculating traders.…”

Recreating the South Sea Bubble: Lessons from an Experiment in Financial History

“…The percentage of traders classified as each type is comparable in the four treatments. Haruvy and Noussair (2006) and Haruvy et al (2013) The market influence of traders of each type is shown in figure 3. It reveals that the NoSwap treatment is the only one characterized by having Fundamental Value traders with more market influence on average than the other two types over the entire session.…”