Journal of Economic Literature (JEL) Code(s)
C91, G11, G12
To explore how speculative trading influences prices in ﬁnancial markets we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) as well as dividend-collecting investors. We ﬁnd that in markets with only speculating investors (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) the “mispricing” is likely to be strategic and not irrational; (iv) mispricing increases with the number of transfers until maturity; and (v) speculative trading pushes prices upward (downward) when liquidity is high (low).
Hirota, Shinichi; Huber, Juergen; Stöckl, Thomas; and Sunder, Shyam, "Speculation and Price Indeterminacy in Financial Markets: An Experimental Study" (2018). Cowles Foundation Discussion Papers. 138.