In this methodological study we analyze price adjustment processes in multi-period laboratory asset markets with five distinct fundamental value
(
FV
)
regimes in a unified framework. Minimizing the ...effect of between-treatment variations we run markets with deterministically decreasing, constant, randomly fluctuating and—as main innovation—markets with deterministically increasing
FV
s. We find (i) efficient pricing in markets with constant
FV
s, (ii) overvaluation in markets with decreasing
FV
s, and (iii) undervaluation in markets with increasing
FV
s. (iv) Markets with randomly fluctuating fundamentals show overvaluation when
FV
s predominantly decline and undervaluation when
FV
s are mostly upward-sloping. Finally, we document that (v) bid-ask spreads and volatility of price changes are positively correlated with mispricing across regimes. The main contribution of the paper is to provide clean comparisons between distinct
FV
regimes, in particular between markets with increasing
FV
s and other regimes.
Contributions by investor-owned companies play major roles in financing the campaigns of candidates for elective office in the United States. We look at the presidential level and analyze ...contributions by companies before an election and their stock market performance following US presidential elections from 1992 to 2004. We find that companies experienced abnormal positive post-election returns with (i) a higher percentage of contributions given to the eventual winner and (ii) with a higher total contribution given. Hypothetical portfolios of the 30 largest corporate contributors formed according to (i) the percentage of contributions given to the winner in a presidential election and (ii) the total contribution (divided by market capitalization) would have earned significant abnormal returns in the two years after an election. While all results hold for Bill Clinton and George W. Bush, they are stronger by a magnitude of two to three under W. Bush.
In this paper we explore how decisions in a sequential three-person game are influenced by either dynamics of roles or group composition. In the game a dictator decides how much of his endowment to ...transfer to the recipient. The supervisor can punish the dictator and/or transfer to the recipient after learning about the dictator’s decision. We find that transfers by a dictator are highest and stable when the group of three is fixed, no matter whether roles change or not. There is limited support of a leading-by-example effect, that is, only when both role and group composition of subjects are fixed, supervisors give more the more dictators gave, and dictators transfer more in the next period the more supervisors gave in a period. Punishment partially has a disciplining effect on dictators. Finally, we observe that subjects’ actual actions are consistent with their beliefs and expectations.
•We study subjects/groups’ proneness to behavioral biases in investment experiments.•Communication and group decision making do not reduce proneness to two biases.•Groups rely less on useless outside ...advice from “experts”.•Groups are more likely to take decisions which are expected value maximizing.•Female only groups are more prone to the hot hand belief than male only groups.
In laboratory experiments we explore the effects of communication and group decision making on investment behavior and on subjects’ proneness to behavioral biases. Most importantly, we show that communication and group decision making do not impact subjects’ overall proneness to the hot hand fallacy and to the gambler's fallacy. However, groups decide differently than individuals, as they rely significantly less on useless outside advice from “experts” and choose the risk-free option less frequently. Furthermore we document gender differences in investment behavior: groups of two female subjects choose the risk-free investment more often and are marginally more prone to the hot hand fallacy than groups of two male subjects.
We investigate the influence of skewness in asset fundamentals on asset prices under different states of uncertainty in double-auction markets. Three different types of assets are considered: risky ...assets, ambiguous assets and assets where the fundamental value distribution can be learned by repeated sampling of realizations. We show that market prices for skewed assets initially differ from those of non-skewed assets for risky as well as for ambiguous assets. Because of learning, the difference in market prices mostly disappears towards the end of trading. When fundamentals are “learned” by experience sampling, prices of all assets, irrespective of skewness, are very efficient from the beginning. Thus, when probabilities are not described but experienced, subjects are better able to estimate the fundamental value of an asset.
We analyze the value of costly information in agent-based markets with nine distinct information levels. We use genetic programming where agents optimize how much information to buy and how to ...process it. We find that most agents first buy high information levels, but in equilibrium buy either complete or no information, with the respective shares depending on the information costs. When information is auctioned, markets are first inefficient, so agents raise their bids to buy the highest information levels, before they learn to bid amounts that they can cover with their trading profits. In equilibrium, markets are not fully efficient, but contain just enough noise to allow informed agents to earn their information costs.
We study the value of information in financial markets by asking whether having more information always leads to higher returns. We address this question in an experiment where information about an ...asset's intrinsic value is cumulatively distributed among traders. We find that only the very best informed traders (i.e., insiders) significantly outperform less informed traders. However, there is a wide range of information levels (from zero information to above average information levels) where additional information does not yield higher returns. The latter result implies that the value of additional information need not be strictly positive. PUBLICATION ABSTRACT
► Using laboratory experiments we test the impact of a Tobin tax in two different market microstructures. ► We find that in markets without market makers an unilaterally imposed Tobin tax (i.e., a ...tax haven exists) increases volatility. ► In contrast, in markets with market makers we observe a decrease in volatility in unilaterally-taxed markets. ► An encompassing Tobin tax has no impact on volatility in either setting. ► Efficiency does not vary significantly across tax regimes.
Trading in FX markets is dominated by two microstructures: exchanges with market makers and OTC-markets without market makers. Using laboratory experiments we test whether the impact of a Tobin tax is different in these two market microstructures. We find that (i) in markets without market makers an unilaterally imposed Tobin tax (i.e. a tax haven exists) increases volatility. (ii) In contrast, in markets with market makers we observe a decrease in volatility in unilaterally taxed markets. (iii) An encompassing Tobin tax has no impact on volatility in either setting. Efficiency does not vary significantly across tax regimes.
The effects of a Tobin tax on foreign exchange markets have long been disputed. We present an experiment with currency trading on two markets, where either none, one, or both markets are taxed. Our ...results confirm the hitherto undisputed issues: a tax reduces trading volume, shifts market share to untaxed markets, and leads to negligible tax revenues if tax havens exist. Concerning the controversial issues we find that (i) volatility effects depend on the existence of tax havens and on market size, (ii) market efficiency decreases in taxed markets when tax havens exist, and (iii) short-term speculation is reduced.
In this paper we explore the influence of the possibility to short stocks and/or borrow money in laboratory markets. A key innovation of our study is that subjects can simultaneously trade two risky ...assets on two double-auction markets, allowing us to differentiate between assets with relatively high versus low capitalization. Divergence of opinions is created by providing each trader with noisy information on the intrinsic values of both assets. We find that when borrowing money or shorting stocks is restricted prices are systematically distorted. Specifically, stocks with high (low) capitalization are traded at lower (higher) prices than their fundamental value. Lifting the restrictions leads to more efficient prices and more liquidity, thereby also lowering volatility and bid-ask spreads.
PDF
