Coordination of Expectations in Asset Pricing Experiments

Abstract

We especially thank our discussants Thomas Langer and Marc Willinger for their helpful comments. The paper improved significantly from comments by an anonymous referee and the editor. Financial support under a NWO-Pionier grant is gratefully acknowledged

Evolution of market heuristics

“…In recent learning to forecast experiments, described at length in Hommes et al (23), qualitatively different aggregate outcomes have been observed in the same experimental setting.…”

“…A number of sessions of a computerized learning to forecast experiment have been performed in the CREED laboratory at the University of Amsterdam; see (23) for a detailed description. In each session of the experiment six participants had to predict the price of an asset for 51 periods and have been rewarded according to the accuracy of their predictions.…”

“…Early experiments, with various market designs such as double auction trading, show convergence to equilibrium (20)(21), while more recent asset pricing experiments exhibit deviations from equilibrium with persistent bubbles and crashes (22)(23). A clear explanation of these different market phenomena is still lacking (24).…”

Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge

“…Frydman et al (2008) argues that the persistent swings in the exchange rate around long-run benchmark values are consistent with such forecasting behavior. Hommes et al (2005aHommes et al ( , 2005b develops models for a financial market populated by fundamentalists and chartists where fundamentalists use long-term expectations based on economic fundamentals and chartists are trend-followers using short-term expectations. Positive feedback prevails when the latter dominate the market.…”

Evolutionary competition between prediction rules and the emergence of business cycles within Metzler’s inventory model

“…Note that there is significant empirical evidence supporting the view that agents are boundedly rational and display rule-governed behaviour. 5 Moreover, laboratory experiments by Hommes et al (2005b) and Heemeijer et al (2009) indicate that agents tend to use simple linear forecasting rules to form predictions. In particular, agents seem to use both extrapolative and regressive expectation formation rules.…”