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, 95 (2), 756-61

Initial Cash/Asset Ratio and Asset Prices: An Experimental Study


Initial Cash/Asset Ratio and Asset Prices: An Experimental Study

G Caginalp et al. Proc Natl Acad Sci U S A.


A series of experiments, in which nine participants trade an asset over 15 periods, test the hypothesis that an initial imbalance of asset/cash will influence the trading price over an extended time. Participants know at the outset that the asset or "stock" pays a single dividend with fixed expectation value at the end of the 15th period. In experiments with a greater total value of cash at the start, the mean prices during the trading periods are higher, compared with those with greater amount of asset, with a high degree of statistical significance. The difference is most significant at the outset and gradually tapers near the end of the experiment. The results are very surprising from a rational expectations and classical game theory perspective, because the possession of a large amount of cash does not lead to a simple motivation for a trader to bid excessively on a financial instrument. The gradual erosion of the difference toward the end of trading, however, suggests that fundamental value is approached belatedly, offering some consolation to the rational expectations theory. It also suggests that there is a time scale on which an evolution toward fundamental value occurs. The experimental results are qualitatively compatible with the price dynamics predicted by a system of differential equations based on asset flow. The results have broad implications for the marketing of securities, particularly initial and secondary public offerings, government bonds, etc., where excess supply has been conjectured to suppress prices.


Figure 1
Figure 1
Mean period prices for experiments. For each period the mean of all of the experiments entailing an initial surplus of cash relative to asset is computed and displayed by the solid line. Similarly, the means for the experiments with an initial surplus of asset are displayed by the dashed line. The mean cash rich values are higher for the duration of the experiment, though the difference is most pronounced at the outset.
Figure 2
Figure 2
Regression: Mean price versus excess supply. The mean of each experiment is computed and plotted with dots against the value of the initial excess supply. The dots at left represent the cash rich experiments that are associated with higher prices, while those at the right are endowed with an excess of asset. A linear regression is displayed by the solid line, with 95% confidence intervals shown by the broken lines.

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