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Interest on Cash, Fundamental Value Process, and Bubble Formation on Experimental Asset Markets

Giusti, Giovanni and Jiang, Janet Hua and Xu, Yiping (2012): Interest on Cash, Fundamental Value Process, and Bubble Formation on Experimental Asset Markets.

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Abstract

We study the formation of price bubbles on experimental asset markets where cash earns interest. There are two main conclusions. The first is that paying positive interest on cash is ineffective in diminishing bubbles through the reducing-active-participation channel. The second is that the fundamental value generating process plays a critical role in the formation of asset bubbles in the laboratory. In particular, bubbles tend to occur whenever there is a conflict between the sign of the time trend of the fundamental value and the sign of the expected dividend payment. This explanation is consistent with all existing studies that analyze the role of fundamental value processes in inducing bubbles on experimental asset markets.

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