Speculation, money supply and price indeterminacy in financial markets: An experimental study

Shinichi Hirota; Juergen Huber; Thomas Stöckl; Shyam Sunder

doi:10.1016/j.jebo.2020.06.010

Speculation, money supply and price indeterminacy in financial markets: An experimental study

Shinichi Hirota, Juergen Huber, Thomas Stöckl, Shyam Sunder

School of Commerce

Research output: Contribution to journal › Article › peer-review

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	https://doi.org/10.1016/j.jebo.2020.06.010
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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title = "Speculation, money supply and price indeterminacy in financial markets: An experimental study",

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.",

keywords = "Backward and forward induction, Experimental finance, Money supply, Overlapping generations, Price bubbles, Price efficiency, Rational expectations, Speculation",

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year = "2020",

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AU - Hirota, Shinichi

AU - Huber, Juergen

AU - Stöckl, Thomas

AU - Sunder, Shyam

PY - 2020

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AB - 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.

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KW - Money supply

KW - Overlapping generations

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