Asset price volatility and investment horizons: An experimental investigation

Abstract

We study the effects of the investment horizon on asset price volatility using a Learning to Forecast experiment. We find that, for short investment horizons, participants coordinate on self-fulfilling trend extrapolating predictions. Price deviations are then reinforced and amplified, possibly leading to large bubbles and crashes in asset prices. For longer investment horizons such bubbles do not emerge and price volatility tends to be lower. This is due to the fact that, for longer horizons, there is more dispersion in participants' forecasts, and participants extrapolate trends in past prices to a lesser extent. We also show that, independent of the investment horizon, if the initial history of asset prices is already relatively stable before participants start their prediction task, price volatility remains small, with prices close to their fundamental values for the duration of the experiment.

Macroeconomic stability of price level targeting in a model of heterogeneous expectations.

“…LtF experiments demonstrate that subjects may converge to the rational (model-consistent) forecast, but this is by no means a necessary outcome. Instead, one can often find a large degree of heterogeneity, backward-looking (myopic) expectations and non-fundamental dynamics (Anufriev et al, 2022).…”

Macroeconomic Stability of Price Level Targeting in a Model of Heterogeneous Expectations

“…LtF experiments demonstrate that subjects may converge to the rational (model-consistent) forecast, but this is by no means a necessary outcome. Instead, one can often find a large degree of heterogeneity, backward-looking (myopic) expectations and non-fundamental dynamics (Anufriev et al, 2022).…”

Financial Literacy and Investment Behaviour of IT Professional With Reference To Bangalore City

“…Thus, it is a reward for waiting for money. So, the first step to investment is savings (Anufriev et al, 2022;Shen et al, 2022).…”