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

Author

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  • 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
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    Cited by:

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    2. Coppock, Lee A. & Harper, Daniel Q. & Holt, Charles A., 2021. "Capital constraints and asset bubbles: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 75-88.
    3. Gortner, Paul & Massenot, Baptiste, 2020. "Leverage and Bubbles: Experimental Evidence," SAFE Working Paper Series 239, Leibniz Institute for Financial Research SAFE, revised 2020.

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    More about this item

    Keywords

    Leverage; Asset Market; Price Bubble; Experimental Finance Classification-JEL: C92; D70; G12;
    All these keywords.

    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

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