CASH INFLOWS AND BUBBLES IN ASSET MARKETS WITH CONSTANT FUNDAMENTAL VALUES

TLDR

Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals are constant, whereas other studies find that higher cash increases prices when fundamentals decline. The study investigates whether higher initial cash levels lead to higher asset prices when fundamental values remain constant. We conducted a new experiment varying initial cash levels while keeping fundamentals constant to observe price effects. The experiment shows that high initial cash creates price bubbles when introduced before market opening, reconciling earlier conflicting results. JEL codes: C90, D03, G02, G12.

Abstract

Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time. This contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time. We report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time. Thus, high cash levels will lead to bubbles, if the cash is introduced before the market opens. Our results reconcile the two previous sets of findings. ( JEL C90, D03, G02, G12)