Explaining Exchange Rate Bubbles In Experimental Foreign Exchange Market

The bubble economy is the important source of the economic crisis. As the main carrier of the bubble economy, the exchange rate bubbles are the important factor to induct the bubble economy. So systematically researching into the exchange rate bubbles theory has great significance and practical values to the healthy development of the foreign exchange market and the economy.As an asset price, rate is also price bubbles like other assets in the market. Bubbles are defined as prices deviating from fundamental values. Although great of propositions have studied on bubbles, how to test them using field data is a big problem, because fundamental values cannot be evaluated accurately in real world. Applying experimental methods, this article researches on the formation of bubbles and measures of attenuating bubbles in laboratory rate markets. We build a framework including information structures to analyze what is the effect of decision behaviors of traders on the rate bubbles.Referring researches of experimental economics in foreign countries, we recruits participants to build laboratory rate markets and conduct three series of asset market experiments: asset market experiments under symmetric information, asset market experiments under asymmetric information, asset market experiments under noise asymmetric information. We use statistical methods to disposal and analyze experimental data, and based on the statistical analytical conclusions to research on the formation of bubbles and measures of attenuating bubbles.In this article, our main conclusions of our asset markets experimental study are the following:(l)When the laboratory environments are information symmetrical, bubbles still exist, that implies symmetrical information is not enough for subjects to form common rational expectations.(2)When the laboratory environments are asymmetrical, the bubbles which there is more insider subjects is smaller than those which there is less insider subjects, but there is Herd Instinct in the noise asymmetric information market.(3) Information asymmetries are the important reason for the rate bubbles. Improving the transparency of market information helps to reduce the bubbles.(4)While learning and experiences are important in reaching common rational expectations, it will less the price bubbles. Because the traders in asset markets are ordinary people, have cognitive and behavioral bias and are prone to overconfidence and thus cause over traded, learning and experiences can strengthen the traders' common expectations.