Coordination of Expectations in Asset Pricing Experiments

Posted: 29 Feb 2008

See all articles by Cars H. Hommes

Cars H. Hommes

Government of Canada - Bank of Canada; CeNDEF, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE); Tinbergen Institute

Henk van de Velden

University of Amsterdam - Amsterdam School of Economics (ASE)

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

Abstract

We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand for the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from six individual expectations. Realized prices differ significantly from fundamental values and typically exhibit oscillations around, or slow convergence to, this fundamental. In all groups participants coordinate on a common prediction strategy.

Keywords: time optimal control problems, Neumann parabolic equations with an infinite number of variables, Dubovitskii-Milyutin theorem, conical approximations, optimality conditions, Weierstrass theorem

Suggested Citation

Hommes, Cars H. and Sonnemans, Joep and Tuinstra, Jan and van de Velden, Henk, Coordination of Expectations in Asset Pricing Experiments ( 2005). The Review of Financial Studies, Vol. 18, Issue 3, pp. 955-980, 2005, Available at SSRN: https://ssrn.com/abstract=900673

Cars H. Hommes (Contact Author)

Government of Canada - Bank of Canada ( email )

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CeNDEF, Amsterdam School of Economics, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
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HOME PAGE: http://https://www.uva.nl/en/profile/h/o/c.h.hommes/c.h.hommes.html

Tinbergen Institute ( email )

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Rotterdam, 3062 PA
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Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

Jan Tuinstra

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Henk Van de Velden

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

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