Price bubbles sans dividend anchors: Evidence from laboratory stock markets

Shinichi Hirota, Shyam Sunder

Research output: Chapter in Book/Report/Conference proceedingChapter

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), prices 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
Title of host publicationBehavioral Interactions, Markets, and Economic Dynamics: Topics in Behavioral Economics
PublisherSpringer Japan
Pages357-395
Number of pages39
ISBN (Print)9784431555018, 9784431555001
DOIs
Publication statusPublished - 2015 Sep 12

Fingerprint

Stock market
Investors
Dividends
Price bubbles
Backward induction
Exit
Futures prices
Stock prices
Price level
Maturity

Keywords

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

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)
  • Psychology(all)

Cite this

Hirota, S., & Sunder, S. (2015). Price bubbles sans dividend anchors: Evidence from laboratory stock markets. In Behavioral Interactions, Markets, and Economic Dynamics: Topics in Behavioral Economics (pp. 357-395). Springer Japan. https://doi.org/10.1007/978-4-431-55501-8_13

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

Behavioral Interactions, Markets, and Economic Dynamics: Topics in Behavioral Economics. Springer Japan, 2015. p. 357-395.

Research output: Chapter in Book/Report/Conference proceedingChapter

Hirota, S & Sunder, S 2015, Price bubbles sans dividend anchors: Evidence from laboratory stock markets. in Behavioral Interactions, Markets, and Economic Dynamics: Topics in Behavioral Economics. Springer Japan, pp. 357-395. https://doi.org/10.1007/978-4-431-55501-8_13
Hirota S, Sunder S. Price bubbles sans dividend anchors: Evidence from laboratory stock markets. In Behavioral Interactions, Markets, and Economic Dynamics: Topics in Behavioral Economics. Springer Japan. 2015. p. 357-395 https://doi.org/10.1007/978-4-431-55501-8_13
Hirota, Shinichi ; Sunder, Shyam. / Price bubbles sans dividend anchors : Evidence from laboratory stock markets. Behavioral Interactions, Markets, and Economic Dynamics: Topics in Behavioral Economics. Springer Japan, 2015. pp. 357-395
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