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Soft Landing of a Stock Market Bubble, An Experimental Study

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Author Info
Ralf Becker
Urs Fischbacher
Thorsten Hens

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Abstract

The paper investigates the effect of interest policy on price bubbles, trading behavior and portfolio choice in experimental stock markets. A series of experiments has 8 participants trade an asset over 15 periods. Alternatively, the participants can invest money in interest-bearing bonds. Treatment groups are subjected to an endogenous interest policy, while control groups experience a constant interest rate. Our stock markets are characterized by bubbles. While we observe a small positive impact of our interest policy on bubbles, the policy also strongly increases market volatility. On the other hand, concerning portfolio choice, we find evidence for value-driven (rational) investment behavior.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp090.

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Handle: RePEc:zur:iewwpx:090

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Related research
Keywords: experimental asset markets; stock market bubbles; interest rate policy;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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References listed on IDEAS
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  1. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August. [Downloadable!] (restricted)
  2. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September. [Downloadable!] (restricted)
  3. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May. [Downloadable!] (restricted)
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  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  5. Lei, V. & Noussair, C. & Plott, C.R., 1998. "Non-Speculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality," Purdue University Economics Working Papers 1120, Purdue University, Department of Economics.
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  6. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anke Gerber & Thorsten Hens & Bodo Vogt, . "Coordination in a Repeated Stochastic Game with Imperfect Monitoring," IEW - Working Papers iewwp126, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  2. Armin Falk & Urs Fischbacher & Simon Gächter, . "Living in Two Neighborhoods - Social Interactions in the Lab," IEW - Working Papers iewwp150, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  3. Enrico De Giorgi, . "Reward-Risk Portfolio Selection and Stochastic Dominance," IEW - Working Papers iewwp121, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  4. Aleksander Berentsen & Guillaume Rocheteau, . "Money and the Gains from Trade," IEW - Working Papers iewwp100, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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    • Aleksander Berentsen & Guillaume Rocheteau, 2003. "Money and the Gains from Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 263-297, February. [Downloadable!] (restricted)
  5. Fehr, Ernst & Henrich, Joseph, 2003. "Is Strong Reciprocity a Maladaption? On the Evolutionary Foundations of Human Altruism," CEPR Discussion Papers 3860, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Thorsten Hens & Klaus Reiner Schenk-Hoppé & Martin Stalder, . "An Application of Evolutionary Finance to Firms Listed in the Swiss Market Index," IEW - Working Papers iewwp128, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  7. Bruno S. Frey & Matthias Benz, . "From Imperialism to Inspiration: A Survey of Economics and Psychology," IEW - Working Papers iewwp118, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  8. Armin Falk, Michael Kosfeld, . "It's all about Connections: Evidence on Network Formation," IEW - Working Papers iewwp146, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  9. Bruno S. Frey, . "Publishing as Prostitution? Choosing Between One‘s Own Ideas and Academic Failure," IEW - Working Papers iewwp117, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  10. Matthias Benz & Alois Stutzer, . "Do Workers Enjoy Procedural Utility?," IEW - Working Papers iewwp127, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  11. Anke Gerber & Marc Oliver Bettzüge, . "Evolutionary Choice of Markets," IEW - Working Papers iewwp109, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  12. Enrico De Giorgi, . "A Note on Portfolio Selection under Various Risk Measures," IEW - Working Papers iewwp122, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  13. Bruno S. Frey & Stephan Meier, . "Museums between Private and Public - The Case of the Beyeler Museum in Basle," IEW - Working Papers iewwp116, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  14. Aleksander Berentsen & Guillaume Rocheteau, . "Money and Information," IEW - Working Papers iewwp099, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  15. Bruno S. Frey & Matthias Benz & Alois Stutzer, . "Introducing Procedural Utility: Not only What, but also How Matters," IEW - Working Papers iewwp129, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  16. Aleksander Berentsen & Guillaume Rocheteau, . "On the Friedman Rule in Search Models with Divisible Money," IEW - Working Papers iewwp155, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  17. Reto Föllmi & Urs Meister, . "Product-Market Competition in the Water Industry: Voluntarily Nondiscriminatory Pricing," IEW - Working Papers iewwp115, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  18. Lars P. Feld & Bruno S. Frey, . "Trust Breeds Trust: How Taxpayers are Treated," IEW - Working Papers iewwp098, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  19. Aleksander Berentsen & Guillaume Rocheteau, . "On the Efficiency of Monetary Exchange:How Divisibility of Money Matters," IEW - Working Papers iewwp101, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  20. Aleksander Berentsen & Esther Brügger & Simon Lörtscher, . "On Cheating and Whistle-Blowing," IEW - Working Papers iewwp153, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  21. Simon Gächter & Ernst Fehr, . "Fairness in the Labour Market – A Survey of Experimental Results," IEW - Working Papers iewwp114, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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This page was last updated on 2009-11-26.

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