Bubble measures in experimental asset markets |
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Authors: | Thomas Stöckl Jürgen Huber Michael Kirchler |
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Institution: | 1.Department of Banking and Finance,Innsbruck University School of Management,Innsbruck,Austria;2.Centre for Finance,University of Gothenburg,Gothenburg,Sweden |
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Abstract: | 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. |
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Keywords: | |
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