Asset Bubbles Without Dividends - An Experiment

Abstract

Bubbles in asset markets have been documented in numerous experimental studies. However, all experiments in which bubbles occur pay dividends after each trading day. In this paper we study whether bubbles can occur in markets with only a final dividend, and consequently a flat fundamental value. We investigate the role of two features that are present in real markets. (1) The mere possibility that some traders may have inside information, and (2) the option to communicate with other traders. We find that bubbles and mirages can indeed occur without dividends. Surprisingly, communication turns out to be counterproductive for bubble formation, whereas the possibility of inside information is crucial as hypothesized.

Keywords: asset markets, bubbles, experiment, mirages, dividends

JEL Classification: C92, G12, D8