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The Boy Who Cried Bubble: Public Warnings Against Riding Bubbles

Author

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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.

Suggested Citation

  • Yasushi Asako & Kozo Ueda, 2012. "The Boy Who Cried Bubble: Public Warnings Against Riding Bubbles," CARF F-Series CARF-F-282, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf282
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    Cited by:

    1. Asako, Yasushi & Funaki, Yukihiko & Ueda, Kozo & Uto, Nobuyuki, 2020. "(A)symmetric information bubbles: Experimental evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    2. Doblas-Madrid, Antonio, 2016. "A finite model of riding bubbles," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 154-162.
    3. Awaya, Yu & Iwasaki, Kohei & Watanabe, Makoto, 2022. "Rational bubbles and middlemen," Theoretical Economics, Econometric Society, vol. 17(4), November.
    4. Feng Liu & Joseph S. White & John R. Conlon, 2023. "A Three‐State Rational Greater‐Fool Bubble Model With Intertemporal Consumption Smoothing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1565-1594, November.

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    More about this item

    JEL classification:

    • 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

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