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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

Zhengyang Bao, Kenan Kalayci, Andreas Leibbrandt () and Carlos Oyarzun

No 14-18, Monash Economics Working Papers from Monash University, Department of Economics

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.

Keywords: Asset market experiment; price limits; the t+1 rule; fundamental values (search for similar items in EconPapers)
JEL-codes: C92 D14 D81 D84 G01 G11 J16 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2019-06
New Economics Papers: this item is included in nep-exp
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