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Asset price volatility and investment horizons: An experimental investigation

Anufriev, Mikhail; Chernulich, Aleksei; Tuinstra, Jan

Authors

Mikhail Anufriev

Jan Tuinstra



Abstract

We study the effects of the investment horizon on asset price volatility using a Learning to Forecast laboratory experiment. We find that, for short investment horizons, participants coordinate on self-fulfilling trend-extrapolating predictions. Price deviations are then reinforced and amplified, possibly leading to large bubbles and crashes in asset prices. For longer investment horizons such bubbles do not emerge and price volatility tends to be lower. This is due to the fact that, for longer horizons, there is more dispersion in participants’ forecasts, and participants extrapolate trends in past prices to a lesser extent. We also show that, independent of the investment horizon, if the initial history of asset prices is already relatively stable before participants start their prediction task, price volatility remains small, with prices close to their fundamental values for the duration of the experiment.

Citation

Anufriev, M., Chernulich, A., & Tuinstra, J. (2022). Asset price volatility and investment horizons: An experimental investigation. Journal of Economic Behavior and Organization, 193, 19-48. https://doi.org/10.1016/j.jebo.2021.11.019

Journal Article Type Article
Acceptance Date Nov 14, 2021
Online Publication Date Dec 2, 2021
Publication Date 2022-01
Deposit Date Nov 7, 2023
Journal Journal of Economic Behavior & Organization
Print ISSN 0167-2681
Electronic ISSN 2328-7616
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 193
Pages 19-48
DOI https://doi.org/10.1016/j.jebo.2021.11.019
Public URL https://durham-repository.worktribe.com/output/1899483