Are Asset Markets Efficient? Evidence from Economic Experiments

Friedel Bolle

Authors

Friedel Bolle European University Viadrina, Große Scharrnstrasse, 59, 15230, Frankfurt (Oder), Germany

Abstract

The assumed superiority of market economy compared with central planning is based on the belief that markets are able to aggregate disperse information about production costs and demand of goods in the form of efficient market prices. Asset markets and futures markets for commodities and assets are believed to evaluate expected future developments — as far as this is possible in the face of fundamental uncertainties. Market failure exists (e.g. because of market power or externalities)
and has to be coun- teracted by state intervention (e.g. cartel authorities or Pigou taxes), but, in principle, free markets are assumed to be the optimal institution. Is this always true, in particular also for asset markets which seem to have a tendency to inflate “bubbles” for which there are many large scale examples? Experimental investigations of asset markets show that, in most cases, market prices “ultimately” converge to optimal Rational Expectation prices. Markets are able to aggregate disperse information, but this process needs particular bubbles, is reported. The most important determinant for the prevention of bubbles is personal experience. Refs 48. Figs 5.

Keywords:

Asset markets, efficiency, Rational Expectations, experimental research

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Author Biography

Friedel Bolle, European University Viadrina, Große Scharrnstrasse, 59, 15230, Frankfurt (Oder), Germany

Doctor of Economics

References

Литература на русском языке

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Translation of references in Russian into English