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The Boy Who Cried Bubble: Public Warnings Against Riding Bubbles

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  • Yasushi Asako

    (Waseda University)

  • Kozo Ueda

    (Bank of Japan)

Abstract

Governments seemed unsuccessful in their attempts to stop bubbles through the use of warnings. This paper examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that the government issues such warnings only after bubbles start. Moreover, the bubble may crash before the warning. If there is the possibility that the government issues a warning even though bubble does not occur, then warnings cannot stop the bubble immediately. Our model suggests that, for public warnings, it is not type-II errors but rather type-I errors that are important in preventing bubbles. Public warnings are effective when they provide information to less-informed investors.

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File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/294.pdf
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Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-282.

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Length: 39 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:cfi:fseres:cf282

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  1. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  2. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
  3. Frederic S. Mishkin, 2007. "Monetary Policy Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134829, December.
  4. Morgan, John, 2004. "Clock Games: Theory and Experiments," Santa Cruz Department of Economics, Working Paper Series qt81m0r0jj, Department of Economics, UC Santa Cruz.
  5. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
  6. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  7. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  9. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  10. Bernheim, B. Douglas & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria II. Applications," Journal of Economic Theory, Elsevier, vol. 42(1), pages 13-29, June.
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