Charting the Market: Fundamental and Chartist Strategies in a Participatory Stock Market Experiment

Abstract

Theorists and market traders have strikingly different views about financial markets. [5] Standard theory assumes identical investors who share their rational expectations about an asset’s future price. Consequently, speculation cannot be profitable, except by luck; trading volume stays low, and market bubbles and crashes reflect rational changes in the asset’s valuation. In contrast, traders do speculate in practice. Also, market deviations exist and are often ascribed to market psychology. There is also an interpretation of these differences at the level of practical trading rules. If speculation works, technical rules that are based on only price or trade volume information may be useful. According to rational expectations theory, however, only fundamental strategies that relate price to fundamental value by using dividend information will yield success.

This research was supported by the GVOP-3.2.2-2004.07-005/3.0 (ELTE Informatics Cooperative Research and Education Center) grant of the Hungarian Government.