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Asset Bubbles without Dividends – An Experiment. Jörg Oechssler (University of Heidelberg) Carsten Schmidt (SFB 504, Mannheim) Wendelin Schnedler (University of Heidelberg). What is a bubble?. standard definition : persistent deviation of prices from fundamental values (+ high volume) - PowerPoint PPT Presentation
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Asset Bubbles without Dividends – An Experiment
Jörg Oechssler (University of Heidelberg)Carsten Schmidt (SFB 504, Mannheim)
Wendelin Schnedler (University of Heidelberg)
What is a bubble?
• standard definition: persistent deviation of prices from fundamental values (+ high volume)
• is that all?
What is a bubble?• Robert Shiller‘s definition: • „...a situation in which news of price
increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who despite doubt about the real value of an investment, are drawn to it partly through envy of others‘ successes and partly through a gambler‘s excitement.“
Inside information
Charts
Chat
measure beliefs!
Charts...
…chat, …
• millions of financial chat groups on the internet
• personal communication with friends, neighbors
• talk among professional traders
…chat, and inside information.
• „stories“ are made up to justify extreme price movements
• e.g. possibly someone has information that „ the new voice-over-IP technique of firm X will revolutionize the telephone market“
Bubble experiments
• Smith, Suchanek, Williams (1988)• austere environment• 15 periods• double auction• asset pays stochastic dividend in each
period, E(d) = 24• fundamental value = 24 * remaining
periods
• many replications• short-selling, 2 assets,
something else to do, etc.• only way to prevent bubbles:
experience in same market
Bubbles and dividends
• all experiments in which bubbles occur pay dividends in each period
• but...• many internet stocks never paid dividends
(Dell, Yahoo!, Oracle…), neither do commodities
• dividends paid out only once per year• good explanation for bubbles?• what if there are no dividends?
Our experiment
• what does it take to produce bubbles with constant fundamental values and only a final dividend?
• our conjecture: there are 2 ingredients:– possibility of inside information – possibility to observe others and
communicate with them
Our experiment
• possibility of inside information→ assets may pay supplements on top of usual
final dividends→ possibility that someone has private info
• possibility to observe others and communicate with them→ chat & charts
Experimental design
• 5 assets (traded sim.), double auction• 10 traders• only final dividend = base value + supplement• base value: U[50,90], E(d) = 70• 2 supplements: one asset 40, one asset 80• endowment: 10 units of each asset• plus 5000 units cash• plus 5000 units loan
Treatments INF: with prob. 0.5 one trader is informed
about one of the assets‘ supplements possibility for mirages, „see something when there is
nothing“, prior exp. by Camerer and Weigelt (1991) finds few mirages
INFCHAT: = INF + chat interface screen
NOINF: no trader knows which assets have supplements control treatment, do bubbles occur with constant
fundamentals and only final dividends?
Timing: a rounddraw od dividends
morning Chat
day 2
...morningChat
day 10
info aboutsupplement
morning Chat
afternoontrading
day 1
noonprediction
afternoon trading
noonprediction
afternoon trading
noonprediction
draw ofdividends
info aboutsupplement
Timing: a rounddraw od dividends
morning Chat
day 2
...morningChat
day 10
info aboutsupplement
morning Chat
afternoontrading
day 1
noonprediction
afternoon trading
noonprediction
afternoon trading
noonprediction
morning chat
afternoon- trading (2 min.)- chart
day 1
noonprediction(days 4, 6, 8)
• why prediction of dividend? speculation vs. confusion
Timing
• why 3 rounds?• experience effects (e.g. Dufwenberg et al.)• 6 sessions per treatment
practice round 1 round 2 round 3 questionnaireround
Results
Are there bubbles w/o dividends?
→ simple answer: yes
What drives them?→ inside information: yes→ chat: no! (just the opposite)
Bubble classification
• mirage: prices substantially above fundamental value, could be justified by information on supplement - but is not
• asset bubble: price deviation which cannot be justified by any possible information (unlikely to happen in our setting – or in reality)
1 2 3 4 5 6 7 8 9 10trading_day
90
120
150
180
210
med
ian
pric
es
Example for an asset bubble
above 150prices cannot bejustified by anyinformation onsupplements
back
Bubble classification
• mirage: prices substantially above fundamental value, could be justified by information on supplement - but is not
• asset bubble: price deviation which cannot be justified by any possible information (unlikely to happen in our setting – or in reality)
• market bubble: price index of 5 assets deviates from fundamental value
70
110
150
190
70
110
150
190
70
110
150
190
70
110
150
190
1 2 3 4 5 6 7 8 910trading_day
70
110
150
190
nice convergence to a priori fundamental value of 94...
... and 150.Information onsupplement correctlyrevealed
But didn‘t adjust expectedvalue for other assets→ market bubble(but no asset bubble)
back
Bubble countbubble type
NOINF INF INFCHAT
mirage n.a. in 12 of 18 rounds
5 / 18
market bubble
4 / 18 11 / 18 3 / 18
asset bubble
(0 / 18) 3 / 18 0 / 18
• no indication that later rounds produce fewer bubbles
Explanatory variable:prob. of bubble round
Base modelwith
shortsalewith
confidence
INFCHAT -0.342** -0.288** -0.324**NOINF -0.354** -0.335*** -0.351**financial knowledge -0.791 -0.726* -0.727male 0.053 0.012 0.003upper division 0.154 0.201 0.314economics 2.896** 2.917** 2.772**business -0.477 -0.155 0.299law 4.778*** 4.645*** 4.678***sciences 2.385* 2.303* 2.305shortsale 0.725top-rank belief 0.171**Observations 54 54 54Log-Likelihood -20.519 -19.150 -19.945Pseudo R² 0.403 0.443 0.420
Probit random effects model
# of subjects who believe that they are going to be top trader in treatment
Overconfidence and experience• overconfidence in INF and
NOINF increasing with experience
• not so for INFCHAT
• does chat moderate overconfidence?
= sign. diff. from 1 at p < 0.02 level
Why is chat counterproductive for bubble formation?
• twice as many chat messages in non-bubble rounds)
• chat may point out overvaluation of market or assets
• chat may explain market mechanics (prevent misunderstanding)
• find examples for both
Speculation or confusion?
• speculation: know that asset is overpriced but speculate on even higher prices to sell
• confusion: don‘t recognize mispricing • which is it?
Speculation or confusion?price at end of this day
fundamental value
Speculation or confusion?
In bubbles rounds:
Big difference betweenexpected price after this day and expecteddividend
→ favors speculation hypothesis
Are prices fully revealing (REE)?
Comparison of final prices to REE pricesinfo about supplement 80 40 0 -40 -80
REE prediction 150 110 94 90 80
median of final prices in rounds 140 95 98 91.5 93.5
number of obs. 16 4 170 16 64
Tactics of insiders
• How do insiders trade?• want to profit from their info without giving
it away• may try to mislead non-insiders
Tactics of insiders
• no insider sold insider assets in first trade• 50% of first trades were limit bids for
insider asset• 20% were market bids for insider asset• 30% were orders for other assets
The slow build-upM
ean
hold
ings
of i
nsid
er a
sset
s by
insi
ders
Timing and prices of bids(by insiders for insider asset)
in seconds
in seconds
Frequency of bidsother bids by insiders for insider asset
Conclusion
• bubbles without dividends are possible• but additional factor necessary:
– possibility that someone has inside information
• chat: counterproductive?
Thank you for your attention
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