Citation:
Journal of economic behavior and organization, vol. 76, n. 2, November 2010, pp. 254-266
ISSN:
0167-2681
DOI:
10.1016/j.jebo.2010.06.014
Sponsor:
The authors acknowledge financial support from Grant ECO2008-00977/ECON from the Spanish Ministry of Education. Kujal acknowledges financial support from the Instituto Universitario de Economía, Consolider-Ingenio 2010 and the Comunidad de Madrid (grant Excelecon). Seminar participants at University of Granada and JEE 2008 conference-Dijon gave helpful comments.
Financial markets are overwhelmed by daily announcements. We use experimental asset markets to assess the impact of releasing public messages with different levels of reliability on asset prices. Subjects receive qualitative announcements in predetermined tradFinancial markets are overwhelmed by daily announcements. We use experimental asset markets to assess the impact of releasing public messages with different levels of reliability on asset prices. Subjects receive qualitative announcements in predetermined trading periods that are either preset by the experimenter, randomly selected, or determined by past asset market prices. We find that messages can play a significant role in bubble abatement, or rekindling. The preset message, “The price is too high,” decreases the amplitude and duration of bubbles for inexperienced subjects. Announcements that depend on the actual level of mispricing reduce bubble magnitude. Meanwhile, a preset or random message, “The price is too low,” prevents experienced subjects from abating bubbles. We account for the effect of public messages by showing that they significantly reduce inconsistent (“irrational”) trading behavior.[+][-]