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Soft Landing of a Stock Market Bubble, An Experimental Study

Ralf Becker, Urs Fischbacher and Thorsten Hens

No 90, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: The paper investigates the effect of interest policy on price bubbles, trading behavior and portfolio choice in experimental stock markets. A series of experiments has 8 participants trade an asset over 15 periods. Alternatively, the participants can invest money in interest-bearing bonds. Treatment groups are subjected to an endogenous interest policy, while control groups experience a constant interest rate. Our stock markets are characterized by bubbles. While we observe a small positive impact of our interest policy on bubbles, the policy also strongly increases market volatility. On the other hand, concerning portfolio choice, we find evidence for value-driven (rational) investment behavior.

Keywords: experimental asset markets; stock market bubbles; interest rate policy (search for similar items in EconPapers)
JEL-codes: E52 G12 C92 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-fmk
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