Cash inflow and trading horizon in asset markets

• It is conjectured that one of the major ingredients of historic financial bubbles was the inflow of money in various forms. We run 36 laboratory asset markets to investigate the joint effect of cash inflow and trading horizon on price efficiency. We show that markets with cash inflow and long trading horizon exhibit bubbles and crashes. We also observe that markets with extended trading horizon but without cash inflow and markets with shorter trading horizon do not trigger bubbles. Finally, we report that beliefs about prices and, importantly, about (constant) fundamentals follow bubble patterns as well.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

Keyword

Experimental finance

Cash inflow

Trading horizon

Backward induction

Asset market

Price

rational-expectations

price efficiency

security markets

stock-prices

bubbles

crashes

information

risk

behavior

traders

Business & Economics

Publication and Content Type

ref (subject category)

art (subject category)