Transcript Thar She Blows: Rekindling Bubbles

Thar She Blows:
Rekindling Bubbles
David Porter
Interdisciplinary Center for Economic Science
George Mason University
Overview of the Experimental
Environment
 The basic experimental set-up has the
following features


15 period asset
Dividend uncertainty




{0,8,28,60}
Initial cash and shares
Double Auction or Call market trading
mechanism
Trader experience
A Different View
Deviation from Fundamental Value
300
Price - FV
200
100
0
-100
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15
-200
-300
-400
Period
Inexperienced
A Different View
Deviation from Fundamental Value
300
Price - FV
200
100
0
-100
1
2
3
4
5
6
7
8
9
10 11
12 13 14 15
-200
-300
Inexperienced
-400
Period
Once Experienced
A Different View
Deviation from Fundamental Value
300
Price - FV
200
100
0
-100
1
2
3
4
5
6
7
8
9
10 11
12 13 14 15
-200
-300
Inexperienced
-400
Once Experienced
Period
Tw ice Experienced
Bubble Characteristics
 Amplitude: measures trough-to-peak change in
asset value relative to fundamental value
Max{
Pt  f t
P  ft
: t  1,...,15}  Min{ t
: t  1,...,15}
E
E
Bubble Characteristics
 Amplitude: measures trough-to-peak change in
asset value relative to fundamental value
Max{
Pt  f t
P  ft
: t  1,...,15}  Min{ t
: t  1,...,15}
E
E
 Duration: measures the length, in periods, of
increases in prices relative to fundamental value
Max{m : Pt  f t  Pt 1  f t 1  .....  Pt m  f t m }
Bubble Characteristics
 Amplitude: measures trough-to-peak change in
asset value relative to fundamental value
Max{
Pt  f t
P  ft
: t  1,...,15}  Min{ t
: t  1,...,15}
E
E
 Duration: measures the length, in periods, of
increases in prices relative to fundamental value
Max{m : Pt  f t  Pt 1  f t 1  .....  Pt m  f t m }
 Turnover: measures market trading activity
V
t
t
S
Liquidity?
Liquidity (Cash/Share_Value)
L=0.5
500
Price - FV
400
300
200
100
0
-100 0
5
10
-200
Period
15
Liquidity? Yes
Liquidity (Cash/Share_Value)
500
L=0.5
L=0.75
Price - FV
400
300
200
100
0
-100 0
5
10
-200
Period
15
Liquidity? Yes
Liquidity (Cash/Share_Value)
L=0.75
500
L=1
400
Price - FV
L=0.5
300
200
100
0
-100 0
5
10
-200
Period
15
Dividend Uncertainty? No
Period
15
13
11
9
7
5
3
250
200
150
100
50
0
-50
-100
-150
Inexperienced
1
Price - FV
Dividend Certainty
Dividend Uncertainty? No and Yes
Period
15
Inexperienced
Once Exp
13
11
9
7
5
3
250
200
150
100
50
0
-50
-100
-150
1
Price - FV
Dividend Certainty
Cohort Experience Seems To Do It
 Experience with same faces and same
environment causes convergence to FV
 Cash exacerbates the bubble characteristics
 Dividend certainty speeds-up the process
Experimental Design
 Dividends
 {0,8,28,60}
 Dividends
 {0,1,8,28,98}
 Initial Portfolios
 Average Portfolio is
4 shares and 720
cents in cash
 Initial Portfolios
 Average Portfolio is
2 shares and 1530
cents in cash
 Twice Experienced
 Same cohort
 Twice Experienced
 Mixed traders
Lead-up (Inexp, 1-Exper)
 Replication with baseline
 Same cohort (5 cohorts – 70 subjects)
through 2 experiments with baseline
parameters
 Third time back


Mixed the cohorts
Changed the environment parameters
Third Time is a Charm
Deviation from Expected Dividend Value
Twice-Experienced Subjects
(Price - Fundamental Value)
400
300
200
100
0
-100
-200
-300
-400
Period
Third Time is a Charm
Deviation from Expected Dividend Value
Twice-Experienced Subjects
400
(Price - Fundamental Value)
300
200
100
0
-100
-200
-300
-400
Period
Or is It?
Deviation from Expected Dividend Value
Twice-Experienced Subjects
(Actual Value - Fundamental
Value)
400
300
200
100
0
-100
-200
-300
-400
Period
Or is It?
Deviation from Expected Dividend Value
Twice-Experienced Subjects
(Price - Fundamental Value)
400
300
200
100
0
-100
-200
-300
Period
Or is It?
Deviation from Expected Dividend Value
Twice-Experienced Subjects
(Actual Value - Fundamental
Value)
400
300
200
100
0
-100
-200
-300
Period
Results
(Intercept)
Inexperienced
Onceexperienced
Twiceexperienced
Rekindle
R2
Amplitude
1.2576
(0.0571)
t=22.0245
N=40
-0.4100
(0.1069)
t=-3.8353
N=21
-1.1690
(0.1538)
t=-7.6007
N=8
-0.0947
(0.2312)
t=-0.4094
N=3
0.49
Duration
9.9024
(0.4110)
t=24.0934
N=40
-3.3524
(0.7690)
t=-4.3594
N=21
-7.0453
(1.1068)
t=-6.3654
N=8
-4.8627
(1.4413)
t=-3.3739
N=3
0.57
Turnover
3.0282
(0.1421)
t=21.3103
N=40
-0.6448
(0.2658)
t=-2.4258
N=21
-1.7482
(0.3825)
t=-4.5704
N=8
-0.7581
(0.5972)
t=-1.2723
N=3
0.20
Conclusion
 Bubbles are pervasive and persistence
 Bubbles depend on the underlying
environment

Common static environment is a necessary
condition for convergence to FV