Monetary policy and cash flow irregularity as drivers of asset price bubbles: An experimental study

Dragana Draganac and Miloš Božović

Chapter 22 in Handbook of Experimental Finance, 2022, pp 281-301 from Edward Elgar Publishing

Abstract: This chapter examines the impact of monetary policy and cash flow irregularity on bubble formation. We design an experimental setup with two levels of risk-free interest rate representing expansionary and contractionary monetary policy. Apart from borrowing and lending at the risk-free rate, participants could trade two types of stocks that differ only in parameters of the stochastic process that generates their dividends. For the first stock, dividends follow a simple diffusion, while for the second one, they follow a diffusion process with low-frequency Poisson jumps. We use the Engle-Granger procedure to test for cointegration between the time series of simulated dividends and the corresponding market-clearing prices obtained experimentally. We also calculate standard experimental bubble measures. The results based on cointegration tests indicate that bubbles are most likely to occur for the asset with more irregular dividends. On the other hand, experimental bubbles do not seem to be more likely under the expansionary monetary policy. Deviation measures corroborate these findings.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.elgaronline.com/view/edcoll/9781800372337/9781800372337.00029.xml (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Temporarily Unavailable

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:elg:eechap:20035_22

Ordering information: This item can be ordered from
http://www.e-elgar.com

Access Statistics for this chapter

More chapters in Chapters from Edward Elgar Publishing
Bibliographic data for series maintained by Darrel McCalla ().