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Regulating Bubbles Away?Experiment-Based Evidence of Price Limits and Trading Restrictions in Asset Markets with Deterministic and Stochastic Fundamental Values

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  • Zhengyang Bao
  • Kenan Kalayci
  • Andreas Leibbrandt
  • Carlos Oyarzun

Abstract

We examine how traders react to two prominent stock market regulations. Under a constant fundamental value (FV) process, price limits and trading restrictions abate bubbles when traders are inexperienced, but inhibit price adjustments when traders gain experience. Under a Markov-process FV, these regulations always increase mispricing. Traders underreact to market news when the FV increases and do not react when the FV decreases. We find evidence of momentum trading and the delayed price discovery hypothesis of price limits. These findings emphasize stress-testing asset market interventions and suggest that price limits and trading restrictions do more harm than good.

Suggested Citation

  • Zhengyang Bao & Kenan Kalayci & Andreas Leibbrandt & Carlos Oyarzun, 2019. "Regulating Bubbles Away?Experiment-Based Evidence of Price Limits and Trading Restrictions in Asset Markets with Deterministic and Stochastic Fundamental Values," Monash Economics Working Papers 14-18, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2018-14
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    More about this item

    Keywords

    Asset market experiment; price limits; the t+1 rule; fundamental values;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination

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