Financial Bubbles: Excess Cash, Momentum, and Incomplete Information

Gunduz Caginalp, David Porter & Vernon Smith (2001) “Financial Bubbles: Excess Cash, Momentum, and Incomplete Information." Journal of Psychology and Financial Markets, Volume 2, Issue 2, pages 80-99. 2001,DOI:10.1207/S15327760JPFM0202_03; 提供的 [PDF]


We report on a large number of laboratory market experiments demonstrating that a market bubble can be reduced under the following conditions: 1) a low initial liquidity level, i.e., less total cash than value of total shares, 2) deferred dividends, and 3) a bid-ask book that is open to traders. Conversely, a large bubble arises when the opposite conditions exist. The first part of the article is comprised of twenty-five experiments with varying levels of total cash endowment per share (liquidity level), payment or deferral of dividends and an open or closed bid-ask book. We find that the liquidity level has a very strong influence on the mean and maximum prices during an experiment (P < 1/10,000). These results suggest that within the framework of the classical bubble experiments (dividends distributed after each period and closed book), each dollar per share of additional cash results in a maximum price that is $1 per share higher. There is also limited statistical support for the theory that deferred dividends (which also lower the cash per share during much of the experiment) and an open book lead to a reduced bubble. The three factors taken together show a striking difference in the median magnitude of the bubble ($7.30 versus $0.22 for the maximum deviation from fundamental value). Another set of twelve experiments features a single dividend at the end of fifteen trading periods and establishes a 0.8 correlation between price and liquidity during the early periods of the experiments. As a result,



Theory and experiment: What are the questions?

Theory and experiment: What are the questions?

  • Vernon L. SmithCorresponding author contact information, E-mail the corresponding author
  • ESI at Chapman University, One University Drive, Orange, CA 92866, United States


This paper deals generally with testing questions that arise both when experimental observations are in accord with the actions we predict, and when they are not. In both cases the inference of truth from observation is inherently ambiguous, and we face the daunting challenge of using our experimental skills and imagination to reduce this ambiguity. Primarily and most difficult of all we have to constantly reevaluate everything, including ourselves, especially in examining how we talk about and interpret our data. Although I will be drawing on examples and experience from laboratory experiments, the issues I consider apply just as meaningfully to other empirical studies whether from field experiments or observations from past records of socioeconomic processes.

JEL classification

  • B41;
  • C92


  • Experimental economics;
  • Game theory;
  • Methodology of science

Theory and experiment: What are the questions? 10.1016/j.jebo.2009.02.008 : Journal of Economic Behavior & Organization |