Abstract
To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.
| Original language | English |
|---|---|
| Journal | Journal of Economic Behavior and Organization |
| DOIs | |
| Publication status | Accepted/In press - 2020 |
Keywords
- Backward and forward induction
- Experimental finance
- Money supply
- Overlapping generations
- Price bubbles
- Price efficiency
- Rational expectations
- Speculation
ASJC Scopus subject areas
- Economics and Econometrics
- Organizational Behavior and Human Resource Management
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Hirota, S., Huber, J., Stöckl, T., & Sunder, S. (Accepted/In press). Speculation, money supply and price indeterminacy in financial markets: An experimental study. Journal of Economic Behavior and Organization. https://doi.org/10.1016/j.jebo.2020.06.010