Asset price volatility and investment horizons: An experimental investigation

Anufriev, Mikhail; Chernulich, Aleksei; Tuinstra, Jan

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
• 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