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RFS Advance Access originally published online on August 18, 2004
Review of Financial Studies 2005 18(3):955-980; doi:10.1093/rfs/hhi003
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

Coordination of Expectations in Asset Pricing Experiments

Cars Hommes
University of Amsterdam

Joep Sonnemans
University of Amsterdam

Jan Tuinstra
University of Amsterdam

Henk van de Velden
University of Amsterdam

Address correspondence to: Joep Sonnemans, Department of Economics and CeNDEF, University of Amsterdam, Roetersstraat 11, 1018 WB, Amsterdam, The Netherlands, or e-mail: j.h.sonnemans{at}uva.nl.

We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand for the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from six individual expectations. Realized prices differ significantly from fundamental values and typically exhibit oscillations around, or slow convergence to, this fundamental. In all groups participants coordinate on a common prediction strategy.


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