The Boy Who Cried Bubble: Public Warnings against Riding Bubbles
CARF Working Paper CARF-F-282, University of Tokyo
44 Pages Posted: 16 Feb 2013 Last revised: 2 Nov 2013
There are 2 versions of this paper
The Boy Who Cried Bubble: Public Warnings Against Riding Bubbles
Date Written: October 28, 2013
Abstract
Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This paper 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 around the bubble starting time. Moreover, the bubble may crash before the warning. If a warning involves the possibility of being issued too early regardless of the bubble starting time, then it cannot stop the bubble immediately. The bubble duration can be shortened by a public warning issued early accidentally, but lengthened if it is issued late accidentally. Our model suggests that governments need to lower the probability of spurious warnings.
Keywords: riding bubbles, crashes, public warnings, asymmetric information
JEL Classification: C72, D82, D84, E58, G12, G18
Suggested Citation: Suggested Citation
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