Asset Markets


Here are two of my co-authored works on asset market bubbles, with data, programs and documentation.

Documentation for experiment, data and statistical work to accompany  the paper "Traders' Expectations in Asset Markets: Experimental Evidence" by Ernan Haruvy, Yaron Lahav and Charles Noussair

Short selling in Asset Markets, to accompany “The Effect of Short-Selling on Bubbles and Crashes in Experimental Spot Asset Markets”, by Ernan
Haruvy and Charles Noussair, Journal of Finance, June 2006, Vol. 61, No 3, pages 1119-1157. 

You can't look at the mayhem taking place in the global economy, which is unarguably linked to Wall Street and not wonder a little about asset markets. 

Here are a few things I can tell you from my research:

1. Prices in experimental asset markets are directly related to the amount of cash and the quantity of shares in the market. This means that short selling and borrowing constraints, due to individual investor constraints, government regulation or self-regulation by markets, or broker practices (regarding the margin requirement for example), do affect prices. Whenever the stock market crashes as it recently did, there is a great deal of talk about the uptick rule and other short selling restrictions. My research suggests that scuh policies could affect prices. However, the same research suggests that this effect may not be necessarily desirable. In bubbly market times, such restrictions on short selling will tend to result in larger bubbles, and therefore subsequently in more painful crashes back to fundamentals.

2. Expectations of future prices seem to be in many instances decoupled from fundamentals. Traders perceptions of what a share is worth is very much dependent on what the share used to sell for in previous periods. I see that in my experiments but also with my friends who rush to buy stocks on their way down to a price of zero under the belief that the shares are now "cheap." In marketing, this is known as a reference price effect. And it appears to be strong. Fortunately, after observing a few bubbles and crashes, traders do learn to anticipate them, as long as the market fundamentals share the same structure from one experimental repetition to the next.  I would not say this is optimistic.

3. Organizing traders into three types-- fundamental value traders, momentum traders, and speculators-- generally allows for nice predictions and decent fit in experimental markets.



So can you predict or recognize when prices are above or below fundamentals based on this research?

It is important to emphasize that though the research suggests that bubbles can occur in the laboratory and are robust to different manipulations, bubbles also go away after a while with learning by experienced subjects (although they can have ups and downs even with longer horizons). Also, generally the naive traders get destroyed after a while by natural selection. So for bubbles to be frequent, one would need a market with suffient entry of naive traders and replacement of those naive traders that get decimated. In other words, it remains to be shown that bubbles are a common occurance in the market. One pattern that is supported in the market: The research suggests that when there is a lot of cash in the system, prices tend to be inflated and when there is too little cash in the system prices tend to be deflated. So in boom times, one would expect to see more bubbles and in bust times, prices may be below fundamentals. This is kind of common sense to investors, but it may not be obvious to some academics.