Price bubbles sans dividend anchors

Evidence from laboratory stock markets

Shinichi Hirota, Shyam Sunder

Research output: Contribution to journalArticle

33 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

Fingerprint

Dividend
Stock Market
Anchors
Bubble
Backward Induction
Horizon
Stock Prices
Evidence
Financial markets
Stock market
Investors
Dividends
Price bubbles
Tend
Converge
Path
Backward induction

Keywords

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

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization

Cite this

Price bubbles sans dividend anchors : Evidence from laboratory stock markets. / Hirota, Shinichi; Sunder, Shyam.

In: Journal of Economic Dynamics and Control, Vol. 31, No. 6, 06.2007, p. 1875-1909.

Research output: Contribution to journalArticle

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