Measures of Price Bubbles in Experimental Financial Markets: Separation between Overvaluation and Undervaluation of an Asset

Abstract:

This article analyzes the different measures of price bubbles in experimental financial markets. These measures are usually based on the difference between real trade prices and fundamental values. In experimental financial markets, the fundamental value of an asset is usually predetermined by organizers and is known. That is what distinguishes them from the real financial markets and makes it possible to measure price bubbles. Different ways of this measurement have predetermined the different measures of price bubbles. At the same time, researchers often use just one or two measures and do not provide any explanation of their choices. This paper analyses the strengths and weaknesses of the main existing measures. The review leads to the proposal of three new measures: relative overvaluation (RO), relative undervaluation (RU) and share of periods with overvaluation (SPWO). The old measures whether did not consider the direction of a deviation of the real trade prices from fundamental ones or allowed positive and negative deviations to compensate each other. This is not the right decision as these deviations have opposite reasons. New measures separate the price deviation for overvaluation and undervaluation that give more opportunities for further research.