Peaks and valleys

Abstract

Purpose -This paper aims to study how the trajectory of fundamental values affects price discovery in an experimental asset market. Design/methodology/approach -An experiment is conducted with two treatments, in which the time path of fundamentals differs between treatments. In the peak treatment, fundamentals first rise and then fall, while in the valley treatment fundamentals first fall and then recover. The experiment allows market prices to be compared to fundamental values. Findings -Both peak and valley treatments experience bubbles when traders are inexperienced. However, price discovery is more rapid and complete in the peak than in the valley treatment. In the peak treatment, prices track the value, the direction of the trend, and changes in trend, more closely than in the valley treatment. Originality/value -This paper documents the first experimental results regarding pricing behavior in markets with non-monotonic fundamentals. It creates an environment (the valley treatment) in which convergence to close to fundamentals does not occur even with repetition of the market under identical conditions. The results demonstrate that the likelihood that an asset market tracks fundamentals depends on the time path of fundamentals.

Testing for Multiple Bubbles in the Nigerian Stock Exchange

“…Powell and Shestakova [26] argued that market characteristics such as investors' level of experience and market duration leads to an asset's absolute mispricing and hence bubbles. This is also the view of King et al, [27]; Dufwenberget al, [28]; Noussair and Powell [29]; Oechssleret al, [30] that bubbles are eliminated in markets where highly-experienced investors exist. Ackertet al, [11] maintained that when a firm is highly liquid, there is the possibility of a bubble.…”

Testing for bubbles in the BRICS stock markets

“…This explanation emphasizes the self-fulfilling nature of expected future price changes based on the concept of 'resale optionality' (Jones, 2014). According to Noussair and Powell (2010) accurate information about the value of the assets is provided to investors when market prices of assets reflect their underlying fundamentals. This price informa tio n aligns investors' incentives to allocate their capital profitably with those decisions that increase overall efficiency in the allocation of capital.…”

How do markets react to (un)expected fundamental value shocks? An experimental analysis

“…Moreover, until recently this literature also assumed a monotonic (non-stochastic) FV process. Recent exceptions are Noussair and Powell, (2010), Kirchler et al, (2012), Breaban and Noussair, (2015) and Stöckl et al, (2015). A few papers also introduced a stochastic FV "random-walk FV-processes" (Weber and Welfens, (2009), Nosic and Weber (2009), Kirchler, (2009), Nosic et al, (2011, Kirchler et al, (2011), Stöckl et al, (2015)).…”

“…A few papers examined the case where the FV is non-monotonic (Noussair and Powell, (2010), Breaban and Noussair, (2015) and Kirchler, (2009)). Noussair and Powell, (2010) investigated how the FV's trajectory affects price discovery in an experimental asset market and transaction prices behavior facing downwards and upwards variation of FV. In their Peak treatment, the FV first rises and then falls, while in their Valley treatment the FV follows the opposite pattern.…”