The Boy Who Cried Bubble: Public Warnings Against Riding Bubbles

Yasushi Asako () and Kozo Ueda

No CARF-F-282, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: Governments seemed unsuccessful in their attempts to stop bubbles through the use of warnings. This paper examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that the government issues such warnings only after bubbles start. Moreover, the bubble may crash before the warning. If there is the possibility that the government issues a warning even though bubble does not occur, then warnings cannot stop the bubble immediately. Our model suggests that, for public warnings, it is not type-II errors but rather type-I errors that are important in preventing bubbles. Public warnings are effective when they provide information to less-informed investors.

Pages: 39 pages
Date: 2012-06
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https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/294.pdf (application/pdf)

Related works:
Journal Article: THE BOY WHO CRIED BUBBLE: PUBLIC WARNINGS AGAINST RIDING BUBBLES (2014)
Working Paper: The Boy Who Cried Bubble: Public Warnings against Riding Bubbles (2014)
Working Paper: The boy who cried bubble: public warnings against riding bubbles (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf282

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