Convergence in experimental double auctions for stochastically live assets

Abstract

We report market experiments in which subjects trade stochastically lived assets that pay a dividend each period and live from period to period with a known probability (.85). Since the probability is like a discount rate, the experiments test whether prices converge to discounted dividend value. We find that prices converge slowly to the discounted dividend value, from below; experienced subjects traded at prices close to the discounted dividend value. The forces creating convergence in this setting appear to be fundamentally different than in most other settings: minimal rationality in information-rich auctions is insufficient to produce convergence. Instead, convergence seems to be caused by one speculator buying much of the supply and holding it for several periods, which causes prices to rise. When prices overshot the discounted dividend value, they were slow to converge downward. Trading volume and allocative efficiency were often low during convergence (due to the speculator's behavior).

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