Coordination of Expectations in Asset Pricing Experiments

Cars Hommes; Joep Sonnemans; Jan Tuinstra; Henk van de Velden

doi:10.1093/rfs/hhi003

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Coordination of Expectations in Asset Pricing Experiments

Cars Hommes¹; Joep Sonnemans¹; Jan Tuinstra¹; Henk van de Velden

¹ University of Amsterdam

Review of Financial Studies 2005

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. Copyright 2005, Oxford University Press.

DOI: 10.1093/rfs/hhi003
Volume: 18 (3)
Pages: 955-980
Language: en
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