THE BOY WHO CRIED BUBBLE: PUBLIC WARNINGS AGAINST RIDING BUBBLES

Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This article 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 a warning is issued in a definite range of p...

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Bibliographic Details
Published in:Economic inquiry 2014-07, Vol.52 (3), p.1137-1152
Main Authors: ASAKO, YASUSHI, UEDA, KOZO
Format: Article
Language:English
Subjects:
Asymmetric information
Economic activity
Economic analysis
Economic models
Economic theory
Government
Investors
Prices and rates
Speculation
Stocks
Studies
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Summary:Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This article 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 a warning is issued in a definite range of periods commencing around the starting period of the bubble. If a warning involves the possibility of being issued too early, regardless of the starting period of the bubble, it cannot stop the bubble immediately. Bubble duration can be shortened by a premature public warning, but lengthened if it is late.(JEL D82, E58, G18)
ISSN:0095-2583
1465-7295
DOI:10.1111/ecin.12084