Abstract
The efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates. Yet, little is known about the contribution of financial professionals to price efficiency. We run 116 experimental markets with 412 professionals and 502 students. We find that professional markets with bubble drivers – capital inflows or high initial capital supply – are susceptible to bubbles, although they are more efficient than student markets. In mixed markets with students, bubbles also occur, but professionals act as price stabilizers. We show that heterogeneous price beliefs drive overpricing, especially in bubble-prone market environments.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
| Original language | English |
|---|---|
| Pages (from-to) | 2659–2696 |
| Journal | The Review of Financial Studies |
| Volume | 33 |
| Issue number | 6 |
| DOIs | |
| Publication status | Published - 28 Aug 2019 |
Bibliographical note
JEL Classification: C92 - Laboratory, Group BehaviorD84 - Expectations; SpeculationsG02 - Behavioral Finance: Underlying PrinciplesG14 - Information and Market Efficiency; Event Studies; Insider TradingAcknowledgments
We thank Peter Bossaerts, Markus Brunnermeier, Alain Cohn, Brice Corgnet, Christoph Engel, Sascha Füllbrunn, Hanjo Hamann, Daniel Kleinlercher, Jörg Oechssler, Stefan Palan, Charles Plott, David Porter, David Schindler, Christoph Siemroth, Wei Xiong, and Stefan Zeisberger; seminar participants at Chapman University, the Helsinki Center of Economic Research (HECER), and the Universities of Innsbruck and Tilburg; and conference participants of ESA 2017 in Vienna, Experimental Finance 2017 in Nice, Austrian Working Group on Banking and Finance 2017, the Dutch Authority for Financial Markets (AFM), the EEG Inaugural Conference at the Max Planck Institute for Research on Collective Goods in Bonn 2018, the Behavioral Finance Working Group Conference 2018, Queen Mary University of London 2018, and the Innsbruck-Vienna Experimental Day 2018 for very valuable comments. We are grateful to Parampreet Christopher Bindra, Laura Hueber, and Julia Scheunert for excellent research assistance. We particularly thank all financial institutions and participating professionals for the excellent collaboration and their enthusiasm. Financial support from the Austrian Science Fund FWF (START-grant Y617-G11 and SFB F63), Radboud University, and the Swedish Research Council (grant 2015-01713) is gratefully acknowledged. This study was ethically approved by the IRB of the University of Innsbruck. A prior version of this paper was presented with the title “Market Experience and Price Efficiency – Evidence from Experiments with Financial Professionals.” Supplementary data can be found on The Review of Financial Studies web site.