FUTURES MARKETS AND BUBBLE FORMATION IN EXPERIMENTAL ASSET MARKETS*
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*Address for correspondence: Charles Noussair, Department of Economics, Rich Building, Emory University, Atlanta, GA 30322‐2240, USA. Email: cnoussa@emory.edu. We thank Paul Healy for developing the computer program used in this study. We also thank participants at the Society for the Advancement of Economic Theory meetings in Rodos, Greece, in the summer of 2003 and the 2003 Australasian Meetings of the Econometric Society, for helpful comments. We especially thank Steve Gjerstad for comments on an earlier version of the paper.
Abstract
Abstract. We construct asset markets of the type studied in Smith et al. (1988), in which price bubbles and crashes are widely observed. In addition to a spot market, there are futures markets in operation, one maturing at the beginning of each period of the life of the asset. We find that when futures markets are present, bubbles do not occur in the spot markets. The futures markets seem to reduce the speculation and the decision errors that appear to give rise to price bubbles in experimental asset markets.
