Bubble measures in experimental asset markets

• We review bubble measures which are commonly used in the experimental asset market literature. It seems sensible to require that measures of mispricing should (i) relate the fundamental value and price, (ii) be monotone in the difference between fundamental value and price, and (iii) be independent of the total number of periods and the absolute level of fundamental value. We show that none of the measures currently used fulfills all these criteria. To facilitate comparability across different experimental settings with different parameterizations we propose two alternative measures which fulfill all evaluation criteria. The measure for mispricing, RAD (relative absolute deviation), is calculated by averaging absolute differences between the (volume-weighted) mean price and the fundamental value across all periods and normalizing it with the absolute value of the average FV of the market. The measure for overvaluation, RD (relative deviation), is calculated analogously, but uses raw difference between (volume-weighted) mean prices and fundamental values. Hence, it provides information on whether the mispricing stems from over- or undervaluation of the asset.

Ämnesord

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

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

Nyckelord

crashes

expectations

information

experimental economics

asset market

bubble

bubble measure

Publikations- och innehållstyp

ref (ämneskategori)

art (ämneskategori)