Paper by Fellow Utz Weitzel in Review of Financial Studies
The paper "Bubbles and Financial Professionals" co-authored by fellow Utz Weitzel (Vrije Universiteit Amsterdam), has been published in The Review of Financial Studies.
The paper is joint work with Christoph Huber, Jürgen Huber, Michael Kirchler, Florian Lindner, and Julia Rose.
Abstract
The efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates. Yet, little is known about the contribution of financial professionals to price efficiency. We run 116 experimental markets with 412 professionals and 502 students. We find that professional markets with bubble drivers – capital inflows or high initial capital supply – are susceptible to bubbles, although they are more efficient than student markets. In mixed markets with students, bubbles also occur, but professionals act as price stabilizers. We show that heterogeneous price beliefs drive overpricing, especially in bubble-prone market environments.