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Can Concentration Control Policies Eliminate Bubbles?

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Author Info

  • Volodymyr Lugovskyy

    ()
    (Indiana University)

  • Daniela Puzzello,

    ()
    (Indiana University)

  • Steven Tucker

    ()
    (University of Waikato)

  • Arlington Williams

    ()
    (Indiana University)

Abstract

We report the results of an experiment designed to study the effect of asset-holdings caps on the formation of bubbles and crashes in laboratory asset markets. Bubbles and crashes are a quite robust phenomenon in experimental settings. Motivated by concentration control policies employed in the Chinese real-estate market, we explore the effects of permanent and short-term caps on individual asset holdings. We find that permanent caps greatly reduce positive bubbles, but tend to generate negative bubbles in later periods. Under short-term caps, on the other hand, we observe no negative bubble in later periods. Furthermore, we also observe no positive bubbles. Our results indicate that concentration control policies can be effective in eliminating bubbles if properly designed.

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File URL: ftp://mngt.waikato.ac.nz/RePEc/wai/econwp/1213.pdf
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Bibliographic Info

Paper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 12/13.

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Length: 26 pages
Date of creation: 30 Nov 2012
Date of revision:
Handle: RePEc:wai:econwp:12/13

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Keywords: experimental asset markets; bubbles; concentration-control policies;

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  1. Charles Noussair & Stephane Robin & Bernard Ruffieux, 2001. "Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values," Experimental Economics, Springer, vol. 4(1), pages 87-105, June.
  2. Noussair, C. & Robin, S. & Ruffieux, B., 1998. "Bubbles and Anti-Crashes in Laboratory Asset Markets with Constant Fundamental Values," Purdue University Economics Working Papers 1119, Purdue University, Department of Economics.
  3. Noussair, C.N. & Lei , V. & Plott, C., 2001. "Non-speculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality," Open Access publications from Tilburg University urn:nbn:nl:ui:12-381105, Tilburg University.
  4. Vivian Lei & Filip Vesely, 2009. "Market Efficiency: Evidence From A No-Bubble Asset Market Experiment," Pacific Economic Review, Wiley Blackwell, vol. 14(2), pages 246-258, 05.
  5. Caginalp, Gunduz & Porter, David & Smith, Vernon, 2000. "Momentum and overreaction in experimental asset markets," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 187-204, January.
  6. Caginalp, G. & Ilieva, V., 2008. "The dynamics of trader motivations in asset bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 641-656, June.
  7. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185.
  8. Mark van Boening & Vernon L. Smith & Charissa P. Wellford, 2000. "Dividend timing and behavior in laboratory asset markets," Economic Theory, Springer, vol. 16(3), pages 567-583.
  9. Charles Noussair & Steven Tucker, 2006. "Futures Markets And Bubble Formation In Experimental Asset Markets ," Pacific Economic Review, Wiley Blackwell, vol. 11(2), pages 167-184, 06.
  10. Michael Kirchler & Jurgen Huber & Thomas Stockl, 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles," American Economic Review, American Economic Association, vol. 102(2), pages 865-83, April.
  11. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2010. "Bubble measures in experimental asset markets," Experimental Economics, Springer, vol. 13(3), pages 284-298, September.
  12. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1731-1737, December.
  13. Ernan Haruvy & Yaron Lahav & Charles N. Noussair, 2007. "Traders' Expectations in Asset Markets: Experimental Evidence," American Economic Review, American Economic Association, vol. 97(5), pages 1901-1920, December.
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