Mitigating bubbles with intrinsic value nudging: an experimental approach

Bar, R 2017, Mitigating bubbles with intrinsic value nudging: an experimental approach, Masters by Research, Economics, Finance and Marketing, RMIT University.

Document type: Thesis
Collection: Theses

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Title Mitigating bubbles with intrinsic value nudging: an experimental approach
Author(s) Bar, R
Year 2017
Abstract Stock market bubbles are known to cause economic and financial disruption. Previous research has explored factors contributing towards the formation of bubbles, however, the effectiveness of bubble mitigation strategies is under researched. I hypothesise that by employing a nudging technique, alerting respondents to deviations between trading prices and intrinsic value of the assets, trading prices will converge to intrinsic value, thus averting bubble formation. An experimental continuous double auction market is employed to test this hypothesis. I find that nudging impacts bubble formation characteristics: amplitude, normalised absolute deviation and turnover are reduced, and asset prices trade closer to their intrinsic values. These results demonstrate that deviations from intrinsic values can be attributed to individual choices, and speculative tendency rather than to a lack of information. Nudges that provide traders with the intrinsic value are therefore an effective and applicable technique to mitigate bubble formations by reducing the participants' speculative behaviour.
Degree Masters by Research
Institution RMIT University
School, Department or Centre Economics, Finance and Marketing
Subjects Finance
Experimental Economics
Keyword(s) Nudge
Experimental Economics
Behavioural Economics
Price Bubbles
Intrinsic Value
Continuous Double Auction
Behavioural Finance
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Created: Fri, 13 Apr 2018, 09:19:59 EST by Denise Paciocco
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