The Effects of Liquidity, Information, and Beliefs in Experimental Asset Markets

Harper, Daniel, Economics - Graduate School of Arts and Sciences, University of Virginia
Holt, Charles, University of Virginia
Korinek, Anton, University of Virginia
Fostel, Ana, AS-Economics (ECON), University of Virginia

In the first chapter, I evaluate the effects of credit constraints in an asset market experiment with present value considerations induced by interest payments on cash. All markets exhibit price bubbles, with peak prices exceeding the present value of dividends and redemptions by 30-130 percent. Starting with a baseline condition (low income, tight credit), a relaxation of credit constraints generates significantly higher price bubbles. A price increase of similar magnitude results from an increase in exogenous income, holding credit tightness constant.

The second chapter uses a laboratory experiment to study the channels through which cash and q affect the production of capital goods. In the experiment, subjects trade and produce capital goods in a dynamic multi-period market where capital depreciates and is subject to convex production costs. Treatments vary the cost of production, aggregate cash level, and subjects’ individual cash holdings. Across all treatments, less than half of subjects’ production decisions are consistent with q-theory. Aggregate cash is significantly correlated with the likelihood of a subject making an optimal decision. Increasing the level of cash in a market decreases the rate of optimal production decisions. After accounting for the magnitude of previous price deviations, cash in the market has a significantly weaker effect on the rate of optimal decision making. Increased price deviations significantly reduce the rate of optimal decisions, these deviations are increased when cash in the market increases.

The third chapter evaluates the extent to which laboratory markets disseminate private information about durable assets. Subjects trade dividend-paying assets for 15 periods, which are then redeemed for a randomly determined value that is revealed in advance to “insiders.” Rational expectations models and the efficient market hypothesis predict prices will incorporate insider information, which precludes bubbles. Markets with both insiders and outsiders exhibit bubbles, with magnitudes uncorrelated with the proportion of insiders. Insiders make more attempts to purchase assets than outsiders, potentially stimulating demand in markets with more insiders. Moreover, insiders make predictions closer to the fundamental value.

PHD (Doctor of Philosophy)
Investment Decisions, Asset Market Experiments, Bubbles
Issued Date: