IDEAS home Printed from https://ideas.repec.org/p/crf/wpaper/13-14.html
   My bibliography  Save this paper

Deflating Bubbles in Experimental Asset Markets: Comparative Statics of Margin Regulations

Author

Listed:
  • Tibor Neugebauer

    ()

  • Sascha Füllbrunn

    (LSF)

Abstract

Margin requirements are being used to regulate the risks of leveraged positions in financial markets. Violated margin requirements trigger margin calls that lead to automated liquidation of open margin positions. Under controlled laboratory conditions we consider the effect of margin trading along with margin calls and automated liquidation on price bubbles. Our results indicate margin trading to reinforce price bubbles and to amend volatility and liquidity. The effect even holds if we allow for short sales. The results indicate that insufficient margin requirements might be an indicator to reinforce price bubbles.

Suggested Citation

  • Tibor Neugebauer & Sascha Füllbrunn, 2013. "Deflating Bubbles in Experimental Asset Markets: Comparative Statics of Margin Regulations," LSF Research Working Paper Series 13-14, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:13-14
    as

    Download full text from publisher

    File URL: http://wwwen.uni.lu/content/download/70475/892159/file/Deflating%20Bubbles%20in%20Experimental%20Asset%20Markets_Comparative%20Statics%20of%20Margin%20Regulations_Neugebauer_F%C3%BCllbrunn_December%202013.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Paul H. Kupiec, 1989. "Initial margin requirements and stock returns volatility: another look," Finance and Economics Discussion Series 53, Board of Governors of the Federal Reserve System (U.S.).
    2. Owen A. Lamont & Richard H. Thaler, 2003. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 227-268, April.
    3. Hsieh, David A & Miller, Merton H, 1990. " Margin Regulation and Stock Market Volatility," Journal of Finance, American Finance Association, vol. 45(1), pages 3-29, March.
    4. Haiwei Chen, 2002. "Price Limits and Margin Requirements in Futures Markets," The Financial Review, Eastern Finance Association, vol. 37(1), pages 105-121, February.
    5. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    6. Chen, Crystal Xiaobei & Rhee, S. Ghon, 2010. "Short sales and speed of price adjustment: Evidence from the Hong Kong stock market," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 471-483, February.
    7. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    8. Gikas A. Hardouvelis, 1988. "Margin requirements and stock market volatility," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 80-89.
    9. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    10. Thomas Gale Moore, 1966. "Stock Market Margin Requirements," Journal of Political Economy, University of Chicago Press, vol. 74, pages 158-158.
    11. Figlewski, Stephen, 1981. "The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 463-476, November.
    12. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-859, July.
    13. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
    14. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
    15. Alexander, Gordon J. & Peterson, Mark A., 2008. "The effect of price tests on trader behavior and market quality: An analysis of Reg SHO," Journal of Financial Markets, Elsevier, vol. 11(1), pages 84-111, February.
    16. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2010. "Bubble measures in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 13(3), pages 284-298, September.
    17. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 241-269.
    18. Officer, R R, 1973. "The Variability of the Market Factor of the New York Stock Exchange," The Journal of Business, University of Chicago Press, vol. 46(3), pages 434-453, July.
    19. Lee, Sang Bin & Yoo, Tae Yol, 1993. "Margin regulation and stock market volatility: further evidence from Japan, Korea and Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 1(2), pages 155-174, May.
    20. Owen Lamont, 2004. "Go Down Fighting: Short Seller vs. Firms," Yale School of Management Working Papers amz2521, Yale School of Management, revised 01 Aug 2004.
    21. Jones, Charles M. & Lamont, Owen A., 2002. "Short-sale constraints and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 207-239.
    22. Day, Theodore E & Lewis, Craig M, 1997. "Initial Margin Policy and Stochastic Volatility in the Crude Oil Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 303-332.
    23. Corgnet, Brice & Kujal, Praveen & Porter, David, 2010. "The effect of reliability, content and timing of public announcements on asset trading behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 254-266, November.
    24. Seguin, Paul J., 1990. "Stock volatility and margin trading," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 101-121, August.
    25. Pedro A. C. Saffi & Kari Sigurdsson, 2011. "Price Efficiency and Short Selling," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 821-852.
    26. King, Ronald R, 1991. "Private Information Acquisition in Experimental Markets Prone to Bubble and Crash," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 14(3), pages 197-206, Fall.
    27. Largay, James A, III & West, Richard R, 1973. "Margin Changes and Stock Price Behavior," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 328-339, Part I, M.
    28. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2002. "Breadth of ownership and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 171-205.
    29. Cohen, Jacob, 1966. "Federal Reserve Margin Requirements and the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 1(03), pages 30-54, September.
    30. Gikas A. Hardouvelis & Panayiotis Theodossiou, 2002. "The Asymmetric Relation Between Initial Margin Requirements and Stock Market Volatility Across Bull and Bear Markets," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1525-1560.
    31. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    32. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, vol. 61(3), pages 1073-1117, June.
    33. Zhang, Wei David & Seyedian, Mojtaba & Li, Jinliang, 2005. "Margin borrowing, stock returns, and market volatility: Evidence from margin credit balance," Economics Letters, Elsevier, vol. 87(2), pages 273-278, May.
    34. Crowley, Steve & Sade, Orly, 2004. "Does the option to cancel an order in a double auction market matter?," Economics Letters, Elsevier, vol. 83(1), pages 89-97, April.
    35. Paul Kofman & James T. Moser, 2001. "Stock margins and the condition probability of price reversals," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 2-12.
    36. Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," American Economic Review, American Economic Association, vol. 101(6), pages 2723-2753, October.
    37. Schwert, C.W., 1989. "Margin Requirements And Stock Volatility," Papers t6, Columbia - Center for Futures Markets.
    38. Luckett, Dudley G, 1982. " On the Effectiveness of the Federal Reserve's Margin Requirement," Journal of Finance, American Finance Association, vol. 37(3), pages 783-795, June.
    39. Camerer, Colin, 1989. " Bubbles and Fads in Asset Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 3(1), pages 3-41.
    40. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    41. Eckardt, Walter L, Jr & Rogoff, Donald L, 1976. "100" Margins Revisited," Journal of Finance, American Finance Association, vol. 31(3), pages 995-1000, June.
    42. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, vol. 74(2), pages 305-342, November.
    43. Lim, Bryan Y., 2011. "Short-sale constraints and price bubbles," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2443-2453, September.
    44. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715, Cowles Foundation for Research in Economics, Yale University.
    45. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    46. Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1119-1157, June.
    47. Michael Kirchler & Jurgen Huber & Thomas Stockl, 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles," American Economic Review, American Economic Association, vol. 102(2), pages 865-883, April.
    48. Antonio E. Bernardo & Ivo Welch, 2002. "Financial Market Runs," NBER Working Papers 9251, National Bureau of Economic Research, Inc.
    49. Grube, R Corwin & Joy, O Maurice & Panton, Don B, 1979. "Market Responses to Federal Reserve Changes in the Initial Margin Requirement," Journal of Finance, American Finance Association, vol. 34(3), pages 659-674, June.
    50. Tseng, Hsiou-Ying, 2010. "How does the removal of the United States short-sale rules impact three Latin American markets?," International Review of Financial Analysis, Elsevier, vol. 19(2), pages 127-133, March.
    51. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, June.
    52. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
    53. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Leverage; Asset Market; Price Bubble; Experimental Finance Classification-JEL: C92; D70; G12;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:crf:wpaper:13-14. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martine Zenner). General contact details of provider: http://edirc.repec.org/data/sfsculu.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.