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Soft Landing of a Stock Market Bubble, An Experimental Study

By Ralf Becker, Urs Fischbacher and Thorsten Hens

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.experimental asset markets, stock market bubbles, interest rate policy

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