Do price limits and same-day trading restrictions abate bubbles? An asset market experiment

Zhengyang, Bao (2015). Do price limits and same-day trading restrictions abate bubbles? An asset market experiment Honours Thesis, School of Economics, The University of Queensland.

       
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Author Zhengyang, Bao
Thesis Title Do price limits and same-day trading restrictions abate bubbles? An asset market experiment
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2015-11
Thesis type Honours Thesis
Supervisor Carlos Oyarzun
Kenan Kalayci
Total pages 74
Language eng
Subjects 14 Economics
Formatted abstract
Price limits and same-day trading restrictions (the T+1 rule) are two market regulations that China Securities Regulatory Commission impose in Chinese A-share stock markets to improve price discovery and decrease volatility, but the effectiveness of these two regulations is debated. This thesis examines the effectiveness of price limits and the T+1 rule using an asset market experiment.

The main innovation of the experiment is that the dividend process follows a Markov process. The new dividend process makes this experiment to be the first asset experiment where participants need market information to predict the share's fundamental price in the future. This dividend process also makes the share's fundamental value to increase in the long-run, and to exhibit correlation in the short-run, which is more realistic.

The main experimental findings are the following. First, this new market environment is not immune to bubbles, but nearly half of these bubbles are negative. The traditional strong convergence of prices to fundamental values in terminal periods is not observed in some markets. Experience decreases bubble size in general, but negative learning is also observed. Second, the T+1 rule turns the negative bubble in the benchmark into a positive one, but price limits do not significantly affect miss-pricing. Third, participants respond to market information imperfectly, and price limits impede the price to fully absorb new market information.
Keyword China economic policy
Stock markets China
Experimental asset market
Market regulations
T+1 rule

 
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Created: Thu, 28 Jan 2016, 10:58:46 EST by Heidi Ellis on behalf of School of Economics