Price bubbles sans dividend anchors: Evidence from laboratory stock markets

Shinichi Hirota, Shyam Sunder

Research output: Contribution to journalArticlepeer-review

37 Citations (Scopus)

Abstract

We experimentally explore how investor decision horizons influence the formation of stock prices. We find that in long-horizon sessions, where investors collect dividends till maturity, prices converge to the fundamental levels derived from dividends through backward induction. In short-horizon sessions, where investors exit the market by receiving the price (not dividends), price levels and paths become indeterminate and lose dividend anchors; investors tend to form their expectations of future prices by forward, not backward, induction. These laboratory results suggest that investors' short horizons and the consequent difficulty of backward induction are important contributors to the emergence of price bubbles.

Original languageEnglish
Pages (from-to)1875-1909
Number of pages35
JournalJournal of Economic Dynamics and Control
Volume31
Issue number6
DOIs
Publication statusPublished - 2007 Jun

Keywords

  • Backward induction
  • Market experiments
  • Short-term investors
  • Stock price bubbles

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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