Momentum and Overreaction in Experimental Asset Markets

Price volatility and investor overreactions are commonplace in experimental asset markets. Understanding the price dynamics in these markets is crucial for designing successful new trading institutions. We report on a series of experiments to test the predictions of a new momentum model using a dynamical systems approach. This model is then pitted against several standard models to predict prices, as well as against expert human forecasters. The comparative results suggest that each model has its advantages and regions of best performance. Overall, the best predictive methods are the momentum model and expert human forecasters.

[1]  A. Harvey.  Time series models , 1983 .

[2]  G. Caginalp,et al.  Initial Cash/Asset Ratio and Asset Prices: An Experimental Study , 2005, Proceedings of the National Academy of Sciences of the United States of America.

[3]  Van Boening,et al.  Call versus continuous auctions: An experimental study of market organization. , 1991 .

[4]  G. Ermentrout,et al.  A Kinetic Thermodynamics Approach to the Psychology of Fluctuations in Financial Markets , 1990 .

[5]  R. Thaler,et al.  Investor Sentiment and the Closed-End Fund Puzzle , 1990 .

[6]  Arlington Williams,et al.  Computerized Double-Auction Markets: Some Initial Experimental Results , 1980 .

[7]  V. Smith,et al.  Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets , 1988 .

[8]  Ping Chen,et al.  Nonlinear dynamics and evolutionary economics , 1993 .

[9]  G. Caginalp,et al.  Statistical Inference and Modelling of Momentum in Stock Prices , 1995 .

[10]  Steven P. Peterson.  Forecasting dynamics and convergence to market fundamentals: Evidence from experimental asset markets , 1993 .

[11]  Christian Rieck,et al.  Financial markets with asymmetric information: A pilot study focusing on insider advantages , 1997 .

[12]  S. Titman,et al.  Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior , 1994 .

[13]  Vernon L. Smith.  Regulatory Reform in the Electric Power Industry , 1996 .

[14]  Richard O. Beil,et al.  Do people rely on the self-interested maximization of others?: an experimental test , 1994 .

[15]  V. Smith,et al.  Futures Contracting and Dividend Uncertainty in Experimental Asset Markets , 1995 .

[16]  Ronald R. King,et al.  The Robustness of Bubbles and Crashes in Experimental Stock Markets , 1993 .

[17]  G. Ermentrout,et al.  Numerical studies of differential equations related to theoretical financial markets , 1991 .

[18]  Vernon L. Smith,et al.  EXPERIMENTAL MARKET ECONOMICS , 1992 .

[19]  Arlington Williams,et al.  Price bubbles and crashes in experimental call markets , 1993 .

[20]  Stock market bubbles in the laboratory , 1994 .