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Initial cash/asset ratio and asset prices: An experimental study

Caginalp, Gunduz and Porter, David and Smith, Vernon L. (1998) Initial cash/asset ratio and asset prices: An experimental study. Proceedings of the National Academy of Sciences of the United States of America, 95 (2). pp. 756-761. ISSN 0027-8424. PMCID PMC18494. doi:10.1073/pnas.95.2.756.

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A series of experiments, in which nine participants trade an asset over 15 periods, test the hypothesis that an initial imbalance of asset/cash will influence the trading price over an extended time. Participants know at the outset that the asset or “stock” pays a single dividend with fixed expectation value at the end of the 15th period. In experiments with a greater total value of cash at the start, the mean prices during the trading periods are higher, compared with those with greater amount of asset, with a high degree of statistical significance. The difference is most significant at the outset and gradually tapers near the end of the experiment. The results are very surprising from a rational expectations and classical game theory perspective, because the possession of a large amount of cash does not lead to a simple motivation for a trader to bid excessively on a financial instrument. The gradual erosion of the difference toward the end of trading, however, suggests that fundamental value is approached belatedly, offering some consolation to the rational expectations theory. It also suggests that there is a time scale on which an evolution toward fundamental value occurs. The experimental results are qualitatively compatible with the price dynamics predicted by a system of differential equations based on asset flow. The results have broad implications for the marketing of securities, particularly initial and secondary public offerings, government bonds, etc., where excess supply has been conjectured to suppress prices.

Item Type:Article
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URLURL TypeDescription CentralArticle
Additional Information:© 1998 The National Academy of Sciences Contributed by Vernon Smith, October 30, 1997. The authors express their gratitude for funding from the Dreman Foundation.
Funding AgencyGrant Number
Dreman FoundationUNSPECIFIED
Issue or Number:2
PubMed Central ID:PMC18494
Record Number:CaltechAUTHORS:20141125-100645891
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:52136
Deposited By: Jason Perez
Deposited On:25 Nov 2014 20:17
Last Modified:10 Nov 2021 19:21

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