The Boy Who Cried Bubble: Public Warnings Against Riding Bubbles
AbstractGovernments 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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Bibliographic InfoPaper 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.
Length: 39 pages
Date of creation: Jun 2012
Date of revision:
Other versions of this item:
- Asako, Yasushi & Ueda, Kozo, 2014. "The boy who cried bubble: public warnings against riding bubbles," Globalization and Monetary Policy Institute Working Paper 167, Federal Reserve Bank of Dallas.
- Yasushi Asako & Kozo Ueda, 2014. "The Boy Who Cried Bubble: Public Warnings against Riding Bubbles," CAMA Working Papers 2014-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-23 (All new papers)
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